MNI NORGES WATCH: Soft Krone Complicates 2024 Cut Signalling
MNI (LONDON) - Norges Bank is widely expected to leave policy on hold at its September meeting, while its commentary and updated rate path could suggest the odds of a cut late this year or in the first quarter of next year are finely balanced as it weighs currency weakness against falling inflation
September projections which stop short of clearly factoring a 2024 cut in or out would be in line with its August commentary and leave policymakers with the freedom to revisit the debate over whether to cut this year in November. At the time of the previous forecast round in June, Governor Ida Wolden Bache said the policy rate would likely stay at 4.5% "to the end of the year.”
Norges Bank has been a laggard among advanced economy central banks in this easing cycle, with the policy rate still at its 4.5% peak. Its August guidance was cloudy, stating that it would "probably keep the interest rate at this level for quite some time to come."
The central bank must contend with currency weakness. Its import-weighted exchange rate index (I-44) is some 4% weaker than at the time of the June policy decision, 2.5% weaker than the June forecast and around 1% weaker than at the time of the August decision.
Norges Bank has cited studies which suggest that the drop in oil prices and the reduced importance of the nation's powerful oil industry may have contributed to the weakening of the krone. Declines in energy prices will have offsetting inflationary effects, as lower costs for consumers and firms have to be weighed against upward pressure on import inflation via the exchange rate channel. (See MNI INTERVIEW: Norges Bank Needs Scenarios For Krone Weakness)
The Bank's June forecasts showed inflation on the target core measure, CPI-ATE, staying above the 2.0% target throughout the three-year projection, dipping from 4.0% this year to 3.4% in 2025 and to 2.4% in 2027. But the latest data showed inflation falling faster than the central bank had expected, dropping 0.7% on the month to stand at up 3.2% on the year, and September's new forecasts may show it getting close to target.