MNI PREVIEW: Norges Bank Set To Hold; Focus on Hike Forecast

The Norges Bank looks set to leave policy on hold Thursday, joining the raft of central banks that have sat tight on policy in September, although it could break ranks with others, signalling that it expects to tighten policy at some point within its forecast horizon.

Alongside the policy decision, the Norges Bank will publish its latest set of forecasts and analysis in the Monetary Policy Report. The June MPR contained a rate forecast implying that the policy rate would stay flat for a couple of years before gradually rising.

The policy rate was then projected to remain at 0% in 2021 and then to edge up to 0.1% in 2022 and on up to 0.5% in 2023. Oddly, in the policy statement following the August meeting Governor Oystein Olsen made no reference to later tightening, saying only that the policy rate was likely to remain at its current level "for some time ahead."

Nevertheless, it would be a surprise if the rate path was much changed from June's. While it is tricky to assess market expectations precisely for the Norges Bank, a hike, albeit in the second half of 2022, does appear to be priced in and the central bank is expected to endorse this.

STABILITY CONCERNS

Operationally Norges Bank, unlike many of its counterparts, has tightly integrating financial stability and monetary policy decision making. One upshot is that financial stability concerns can weigh on policy decisions.

Earlier this month, Deputy Governor Ida Wolden Bache highlighted a reacceleration in house price inflation, which after decelerating markedly in early 2020 has shot back up to near 5% year-on-year. Norges Bank could use policy signalling, warning that rates could start to move up, as a way of trying to dampen house price inflation.

Social controls in response to the Covid-19 pandemic have also triggered a surge in goods consumption in Norway. Nevertheless the country, with its strong goods export sector, has seen a near-term hit to overall economic activity. GDP fell 6.3% q/q in Q2, similar to Sweden's 8% fall but only a fraction of the 12% and 20% quarterly declines seen respectively in the euro area and the UK.

Tightening in the short-term is off the table and with evidence of second wave of infections starting in its export markets, the committee will want to sit tight for now.

Near term, Norges Bank is set to continue to ensure liquidity and cheap funding for the banking sector through its F-loan programme, although announcements on the details of this have been inter-meeting so nothing new is expected Thursday.