MNI REVIEW: Norges Bank On Hold; No Hike Until Econ Normalises

The Norges Bank left its policy rate unchanged at zero percent in September, publishing a collective rate forecast in its Monetary Policy Report (MPR) showing the rate on hold next year but starting to edge higher in 2022, reaching 0.5% in 2023.

While the collective rate forecast aligned with the previous one in June, the board tweaked its policy guidance, stating that there would be no hikes until it was clear economic conditions were getting back to normal.

The MPR said that higher house price inflation, a slightly higher forecast for real wage growth and broadly unchanged GDP forecasts suggested that, mechanistically, the rate forecast should have been higher than in June but that the committee had exercised its judgement to keep it steady.

The sum of the various economic factors "indicates in isolation a slightly higher rate path than in the June Report, also in the near term (but) the policy rate forecast for the coming years is kept unchanged at 0%. This reflects judgement-based assessments," the MPR said.

PROJECTIONS

The projections in the MPR showed inflation running a little weaker than in the previous June forecasts.

On the central bank's target measure, CPI-ATE, inflation year-on-year was projected to be 2.3% in 2021, down 0.3 percentage point from the June forecast but still above the 2.0% target, before falling to 1.7% in 2022, down 0.1 point from June. Mainland GDP was expected to fall 3.6% this year, before rebounding with a 3.7% rise in 2021 and a 2.7% rise in 2022, only marginally different from previous forecasts.

The broad message from the board and the analysis in the MPR was that uncertainty was elevated with the risk of a strong second Covid wave across Norway's key export markets. The policy guidance aims to give reassurance that the board will not start tightening for financial stability or inflation overshoot concerns if the economy is not clearly back on track.

The Norwegian economy performed relatively strongly over the summer, with unemployment falling and activity increasing, but the Norges Bank own business survey found firms expected weak activity ahead, with broadly flat employment levels.

Norges Bank noted the marked rise in housing market activity through the summer and the faster than expected rise in household credit growth. As the committee mixes both financial stability and monetary policy, fears of increasing stability risks could be used to justify tightening, but a re-tightening of macro-prudential mortgage regulations may be the preferred tool.