MNI REVIEW: Norges Bank Hikes, But Flattens Rate Path

By David Robinson

     LONDON (MNI) - The Norges Bank hiked its key policy rate by 25 bps to 1.50%

Thursday, but flattened the future interest rate path laid out in its collective

forecast.

     The rate profile suggests that the policy rate could peak at its current

level. The Bank had previously attached a 50% chance, on MNI calculations, to a

25 basis point hike in September and with no clear steer from board members

before the meeting analysts were pretty evenly split over whether or not there

would be a rate increase.

     The following are key points from the policy decision, statement and

accompanying Monetary Policy Report (MPR), which sets out the detailed economic

projections.

     -On MNI calculations the Norges Bank is now attaching a 40% chance to a

hike by the end of 2020. The terminal rate in the three year forecast is below

the 2020 rate, at 1.5% in 2022,  with this profile entailing that it is a little

more likely than not that there will not be another hike. "The Executive Board's

current assessment of the outlook and balance of risks suggests that the policy

rate will most likely remain at this level (1.5%) in the coming period,"

Governor Oystein Olsen said in a statement.

     -The Norges Bank highlighted the opposing forces pulling on monetary

policy. Domestic growth is solid with debt rising, although the global outlook

is less rosy with a low interest rate environment. "The policy rate forecast

indicates a slightly smaller rate rise than in the June Report. Weaker growth

prospects and lower interest rates abroad have contributed to the downward

revision," the policy statement said.

     -The MPC noted that its policy discussions focussed on global developments,

including global trade tensions, Brexit and the very low level of foreign

interest rates. These suggest downside risks may materialize and that the krone

could be hit. "Should the UK exit the EU without a deal, or if trade tensions

deepen further, both external and domestic growth may turn out lower than

projected. Owing to persistent global uncertainties, the krone may prove to be

weaker than assumed," the board said in it assessment.

     --The krone, on its trade weighted I-44 measure, fell by about 2% in

comparison to its level in the June MPR. The Norges Bank forecast that it would

rally, but less strongly than previously assumed. The forecast was for I-44  to

move from 107.0 this year to 106.8 in 2020, a 3.5% appreciation, and to post

another 3.5% appreciation in 2021, taking it to 106.4 (lower I-44 readings

indicate an appreciation). 

     -The MPR projections showed Norwegian growth increasing by 1.3% in 2019, a

sharp cut from the previous 2.0% forecast, but to then pick-up pace to 2.2% in

2020 and 1.9% in 2021, both little changed from the previous forecast.

Unemployment was expected to flat-line at low levels, coming in at 3.5% in 2019,

3.4% in 2020 and 3.5% in both 2021 and 2022. Inflation was projected to hold

just above the 2.0% target at 2.1% in 2020 and 2.2% in 2021 and 2022.

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

[TOPICS: M$E$$$,MT$$$$,MX$$$$]