MNI REVIEW: Norges Bank Hikes; Lowers Rate Path For 2021

By David Robinson

     LONDON (MNI) - Norges Bank's Executive Board hiked its policy rate by 25

basis points to 1.0% and raised its near-term collective rate profile, but

lowered the rate path further out.

     The policy decision was accompanied by the release of the quarterly

Monetary Policy Report (MPR), which contains the Bank's economic forecasts and

the collective rate path of its board.

     Following are key points from the report and the policy decision:

     --As well as hiking 25 basis points Norges Bank indicated that another hike

was likely on the way in the back half of 2019.

     "The Executive Board's current assessment of the outlook and balance of

risks suggests that the policy rate will most likely be increased further in the

course of the next half-year," the statement said.

     --The collective rate path was raised near-term but the board removed a

25-basis-point hike in 2021 compared to its December projections.

     The forecast showed that after the additional 25-basis-point hike this year

the policy rate would rise only slowly to reach 1.75% at the end of 2022.

     The MPR stated that the shift upwards in the policy rate projection at the

start of the forecast "partly reflects stronger domestic demand and a weaker

krone."

     The downward revision further down the line reflected gentler expected

tightening abroad, with Riksbank head Oystein Olsen having previously stated

that its policy is constrained by those of major central banks.

     --The near-term inflation forecast was raised, following surprisingly

strong recent data, with inflation spiking above the 2.0% target on the CPI-ATE

measure. It was then shown falling back close to the 2.0% target and staying

there from 2020 onwards.

     The board is prepared to accommodate, at least in part, the near-term

inflation overshoot because of concerns over downside risks from abroad.

     "The uncertainty surrounding global developments and the effects of

monetary policy suggests a cautious approach to interest rate setting. That

judgement implies a somewhat smaller upward adjustment of the interest rate path

than new information in isolation would indicate," the MPR stated.

     --The MPR said that krone weakness could persist, with signs that the

equilibrium exchange rate had fallen.

     "The conditions that have contributed to a weak krone are assumed to be of

a more permanent character than envisaged earlier," the report said.

     The MPR contained an analysis of the drivers of the krone exchange rate. It

cited the oil price as a key factor, with a persistently lower oil price leading

to a weaker equilibrium exchange rate and softer wage growth in order to boost

competitiveness.

     "Since the oil price fall, the nominal exchange rate has depreciated

markedly, and wage growth has been low," the report said.

     The oil price was forecast to drift down from USD66 per barrel in 2019 to

USD65 in 2020 and USD63 in 2021.

     The impact of the lower exchange rate on policy setting was deemed to be

broadly neutral, as higher imported inflation is offset by the weakness of wage

growth.

     --The detailed forecasts showed robust near-term growth for Norway,

excluding the offshore oil component, with mainland GDP seen up 0.6% on the

quarter in Q1 and up 0.8% in Q2.

     The 2019 GDP forecast was raised to 2.7%, up 0.4 percentage point from the

December projection, and raised to 1.8% for 2020, up 0.2 percentage point.

     Unemployment was forecast to flat-line at 2.3% in coming months and to dip

to 2.2% in 2020.

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

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