MNI NORGES WATCH: Timing Of First Cut Seen Pushed Back

The Norges Bank looks set to leave its key policy rate unchanged at 4.50% at its June meeting, with the focus on whether its updated policy rate path will reinforce May's hawkish guidance that "a tight monetary policy stance may be needed for somewhat longer than previously envisaged."

The change in policy guidance in May was a surprise to many as it seemed to pre-empt the outturn of June's full quarterly forecast round and collective rate path. At the press conference Governor Ida Wolden Bache deflected questions on the likely timing of the first rate cut by referring to then-unknown June forecasts, and Norges Bank's messaging would be discordant if it did not now raise its previous quarterly rate path and lower the likelihood of a September cut.

Analysts are divided over whether the Bank will still show a third quarter cut as more likely than not or whether it will push the likely timing of the first cut back to December. The end point of the three-year forecast, reflecting the neutral rate, is still likely to be around 3%.

Norges Bank’s commentary, and Wolden Bache at her press conference, are again likely to put weight on upside inflation risks from any further krone weakness.

On its import-weighted I-44 index, the krone on average has been a little weaker in the second quarter than in the March forecast, but is still stronger than the starting level. With its forecasts based on a nearly flat exchange rate, there is a debate around how the Bank should reflect downside risks to the currency, though this month may be too early for the deployment of alternative scenarios.

Headline inflation on the target CPI-ATE measure, which adjusts for tax and excludes energy, came in at 4.1% in May, a touch below Norges Bank's prediction. But with service sector inflation at 4.9% Norges Bank’s message is likely to focus on the risks of persistent underlying inflation.