MNI NORGES WATCH: Policy Seen Steady In Aug, Guidance Key

MNI (LONDON) - Norges Bank looks set to leave its key policy rate on hold at 4.5% at its August meeting, in line with guidance from Governor Ida Wolden Bache for policy to probably remain unchanged until the end of the year and as exchange rate volatility counterbalances inflation that has been lower than expected in its June forecasts. 

Analysts are united in the belief that there will be no cut this month, making the Norwegian central bank a laggard in the easing cycle, but there is uncertainty as to whether guidance will be tweaked and they are divided over when the first reduction to rates will come. Market pricing points to a cut in the fourth quarter of this year, though some analysts expect do not expect it until the first quarter of 2025.

In order to support the krone, which sold off during last week’s market tremors before retracing, and to reduce the risks of higher imported inflation, Wolden Bache could simply reaffirm current guidance "that the policy rate will continue to lie at 4.5% to the end of the year, before gradually being reduced.” Alternatively, the dip in inflation could prompt the committee to adjust the guidance to cite the possibility of earlier-than-previously-anticipated easing, though in the absence of a fresh rate forecast it would be likely to avoid any explicit reference to the month in which a cut could come.

August is an interim meeting for Norges Bank's Monetary Policy and Financial Stability Committee, with fresh economic commentary but no new forecast round, and irrespective of whether guidance is altered, Wolden Bache is likely to reference the September forecasts as the time for any reassessment of the policy path.

KRONE WEAKNESS

Currency concerns have previously been a key driver of policy and at the time of the June decision, Wolden Bache was still keen not to rule out a rate hike. (See MNI INTERVIEW: Norges Bank Could Still Hike - Wolden Bache).

Since then, July inflation data showed the target core measure, CPI ATE, at 3.3% on the year, 0.4 percentage point below Norges Bank's forecast, and CPI at 2.8% compared to the 3.4% forecast

However, while Norges Bank's forecasts have assumed that the krone would oscillate around a constant level on its import-weighted I-44 currency index, it has tended to be weaker than predicted, helping to feed calls for it to provide alternative policy scenarios to reflect downside risks (See MNI INTERVIEW: Norges Bank Needs Scenarios For Krone Weakness)

The I-44 was 121.87 on Aug 9, 3.4% higher than on the day of the June meeting and 6.4% above its June trough, with a higher reading representing depreciation.  The krone’s volatility of recent weeks likely reflected swings in global risk perception and moves in oil prices.