MNI NORGES WATCH: On Hold, Pushes Back Timing Of First Cut

Norges Bank left its key policy rate unchanged at 4.5% and published guidance that pushed back against the September cut that it had previously signaled, suggesting instead that the first cut will not come until closer to the end of the year at the earliest which now aligns with market pricing.

Governor Ida Wolden Bache had previously said that the most likely timing of the first cut would be in September, but her comments and Norges Bank's policy statement made it clear that the key rate could well stay at 4.5% at least until the winter. Although headline inflation has fallen somewhat faster than expected, stronger wage growth and the weakness of the Norwegian krone were cited as upside inflation risks.

"The way we now assess the prospects, the interest rate will probably be kept at the current level for quite some time to come," Wolden Bache said, with the committee's policy statement adding "that there may be a need to keep the interest rate up somewhat longer than we previously envisioned."

UNEXPECTED TWEAK

Norges Bank's next full forecast round will be undertaken for the June meeting and the change in guidance at this meeting was not widely expected. The previous forecast, in March, showed the policy rate staying at 4.5% until the autumn and then gradually decreasing.

Policymakers noted in analysis published alongside the May decision that interest rate expectations had risen abroad and Norwegian rate expectations had increased along with them, with market pricing pointing to a December cut. Norges Bank's change in guidance will reinforce that view.

As well as krone weakness, and rising rate expectations abroad squeezing rate differentials between Norway and elsewhere, another upside inflation risk cited by the central bank came from the wage settlement of 5.2% for 'frontline' industry sectors, which it said suggested that wage growth this year may be slightly higher than its March estimate for annual wage growth of 4.9%.