MNI NORGES WATCH: Well-Flagged 25Bp Hike Seen, More On The Way

Norway’s central bank looks set to follow up its 25-basis-point hike in March with another in May, taking the policy rate to 3.25%, and to signal that it will continue to tighten by a further 25bp in June.

Despite having been earlier than other central banks to start tightening, krone weakness and upside surprises to headline inflation mean Norges Bank looks unlikely to be first to finish. While no full forecast round will accompany May’s decision, its commentary and subsequent press conference are likely to maintain February's assessment that the policy rate has further to rise, with some analysts now making the case for a 3.75% peak in rates, compared to the central bank’s March projection of a level a little above 3.5%.

The bank's I-44 trade-weighted krone index, which rises if the currency depreciates, gained 5.8% over the two months to end-April and some 4% on the month to 123.63. The central bank considers that increased international uncertainty, a lower oil price and changes in interest rate differentials as monetary policy tightens elsewhere are likely to have all weighed on the currency.

FX STRATEGY

In March, Norges Bank's Monetary Policy and Financial Stability Committee said "the policy rate will most likely be raised further in May", and it looks likely to deliver on Thursday, when Governor Ida Wolden Bache is also likely to face questions about the FX purchasing strategy.

The bank announced only marginal cuts to planned daily foreign exchange purchases on behalf of the government to NOK1.4 billion in May from NOK1.5 billion, with some analysts arguing that in light of currency weakness a more rapid deceleration would be justified.

The real economy appears to be evolving largely as the central bank expected, although inflation has been more stubborn than anticipated.

Unemployment edged up to 3.6% in March on the labour force survey measure from 3.5% in February, while headline inflation surprised, coming in at 6.5% in the month compared to the 6.0% projected in the February Monetary Policy Report.

The labour market has been tight on a range of measures, including on the unemployed-to-vacancies ratio, though there are signs the peak may have been reached. In the first quarter, the Bank's own Regional Network Report found that the proportion of contacts reporting recruitment difficulties had fallen sharply and slower activity was anticipated ahead.