MNI PREVIEW: All Eyes On Norges Bank's Steer On Sep Rate Hike

By David Robinson

     LONDON (MNI) - Norges Bank's Executive Board, faced with a sharply

depreciating currency and still firm domestic activity data, faces a tricky

decision at this month's meeting over whether to clearly signal a September hike

or to retain ambiguity over the likely timing of the next move.

     Norges Bank's board will doubtless leave policy unchanged at its August

meeting and the market's focus is firmly on what fresh guidance, if any, it

gives on the likely timing of the next hike. In its most recent quarterly

collective interest rate path, published back in June, the board attached just a

10% probability to an August hike and a 50% probability to a 25 basis point rate

hike in September, according to an MNI estimate, and members now have to decide

whether to get off that fence.

     The trickiness is that on the downside domestic activity growth, while

still firm, appears to have eased somewhat and risks abroad have risen, while on

the upside a sharp fall in the Norwegian krone and a lack of spare capacity are

supportive of near term tightening.

     The Norwegian central bank has a track record of transparency over what it

perceives as the likely timing of the next policy move. Governor Oystein Olsen

trailed the most recent 25 basis point hike, stating after the May meeting that

"the policy rate will most likely be raised in June."

     If he wanted to provide a similar, crystal clear warning this time around

he would flag up a September hike by adding precision to the board's current

guidance "that the policy rate will most likely be increased further in the

course of 2019."

     Recent currency moves bolster the case for tightening. Norges Bank's I-44,

its import weighted currency measure, stood at 108.18 on Aug 8 versus 105.76 a

month ago, with a higher reading indicating a deprecation, in this case of 2.3%

on the month, a move that contrasts sharply with the central bank's June

prediction of gradual appreciation.

     In an MNI interview on July 12 Norges Bank Deputy Governor Jon Nicolaisen

cited currency moves as a potential brake on policy.

     He said that, all else being equal, foreign exchange moves "would limit how

far we could increase interest rate differentials before we run into problems

with inflation and output, which is our target."

     The recent fall in the currency, however, appears to be dictated not by any

shift in rate expectations but in part by the sharp fall in the oil price, with

oil and gas accounting to close to 70% of Norwegian exports.

     The Bank's own research has shown that while krone movements do not usually

correlate well with the oil price they have done when the oil price falls

heavily, and Brent crude is currently 22.5% lower than its April peak. 

     Norges Bank stands alone among advanced economy central banks in staying on

the tightening path with other central banks either clearly signalling easing or

having markets assume they will not deliver it. 

     A common view among analysts is that the board will signal a September hike

but the case is far from overwhelming and it could instead point to a hike a bit

further down the road, with its June forecast showing a 90% chance of a hike by

October.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com