MNI PREVIEW: Norges Bank Done With Cuts; Flat Rate Forecast

-Policy Rate On Hold At Zero In June; Focus On Policy Pass Through

By David Robinson

     LONDON (MNI) - The Norges Bank looks set to keep policy unchanged Thursday,

with the accompanying Monetary Policy Report showing a flat rate path as

policymakers take stock after easing measures in both March and May pushed the

policy rate to a record low 0%.

     The bank's Monetary Policy and Financial Stability Committee seems done

with rate cutting for now, having stated following the May meeting it was "of

particular importance to ensure well-functioning financial markets" and that "it

does not envisage making further policy rate cuts," therefor taking negative

rates out of the equation.

     The policy rate was shown holding at zero through 2023, and a repeat of

this looks more than likely in the June MPR.

     What comes next for the Norges Bank, if further action is needed, remains

unclear, as Governor Oystein Olsen has set out the case against QE, noting the

idiosyncrasies of Norwegian debt and bank funding.

     Interest rates in the relatively small and illiquid government bond market

are not key reference rates for other markets and Olsen believes bulk central

bank buying risked drying up liquidity without driving down the interest rates

faced by firms and businesses.

     --MONEY MARKETS

     The central bank has looked for other ways to push down on borrowing costs,

providing several rounds of F-loans, three-month loans in NOK and USD, with the

latest announced Tuesday for USD 3 billion of loans at a lowest permitted rate

of the 3m USD OIS rate plus 0.25 percentage points.

     Its liquidity and credit easing operations are not tied to the regular

policy meetings, softening the focus on the regular meetings with the policy

rate now set for a prolonged period at zero.

     The MPFSC has also reduced the likelihood of surprises in the quarterly

MPRs by providing updated forecasts and much more detailed commentary in non-MPR

meetings.

     --PROJECTIONS

     The projections accompanying the May meeting showed higher inflation in the

year ahead as a result of krone depreciation but with high unemployment and low

wage growth forcing it to moderate thereafter. CPI-ATE, the target inflation

measure, was expected to be 2.8% up on the year in 2021, falling to 2.1% in 2022

with mainland, or non-oil, GDP falling 5.2% this year and rising 3.0% next year

and 3.3% in 2022.

     June's MPR will update these forecasts. The central bank's latest Regional

Agents Report highlighted the plunge in economic activity but did suggest some

brighter spots ahead and with Covid infection rates relatively low in Norway and

the economy at the forefront of re-opening it is not clear that the economic

situation is deteriorating much more than Norges Bank previously envisaged.

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

[TOPICS: MX$$$$]