MNI State of Play: Cautious Norges Bank To Stick To Q1 Hike

By David Robinson

     LONDON (MNI) - Norges Bank's Executive Board's October meeting is set to be

a low key affair following the September rate hike, with the board set to leave

expectations of a first quarter hike undisturbed.

     In September the board hiked the key policy rate by 25 basis points to

0.75% and its rate path pointed to no further hikes this year. Norges Bank

publishes average quarterly rate paths and Market News's best estimate was for

no chance of an October move and a 26% probability of another 25-basis-point

hike in December.

     A common view among analysts and market participants is that the next

increase will come at the end of the first quarter, at the March meeting, rather

than in January.

     This chimes with Governor Oystein Olsen's advocacy of a cautious approach

to tightening in order to allow businesses and consumers to adjust to rising

interest costs.

     "A long period of low interest rates and mounting household debt burdens

has led to greater uncertainty surrounding the effects of higher interest rates.

This suggests a cautious approach to interest rate setting," Olsen said in an

Oct. 9 speech at the Bank of Thailand.

     The September forecasts showed the policy rate rising gently throughout the

following two years, reaching 2.0% by end 2021, with protectionism and emerging

market turbulence cited as downside risks.

     --TRADE RISKS

     While at first glance Norway, which does just over 70% of its trade with

the EU, might appear to be insulated from Washington's trade wars, an increase

in U.S. auto tariffs on EU manufacturers would sting. Norway is the primary

supplier of aluminium to the EU, with auto makers among the major buyers.

     "Rising protectionism internationally and turbulence in some emerging

economies adds to the risk picture, with potentially strong negative effects for

Norway," Olsen said.

     Norges bank policymakers will need time to see if recent asset market and

political turbulence is feeding through to the real economy. The latest data

point show no softening in overseas demand.

     The headline reading in Statistics Norway's third quarter Business Tendency

Survey, published Friday, dipped to 8.9 from 9.2 but the detailed data showed

that for mining, manufacturing and quarrying export new orders growth was

expected to accelerate in the first quarter.

     The diffusion index for expected new export orders rose to 59.3 from an

anticipated 58.6 in the second, while the expected domestic orders balance was

up to 59.1 from 58.4.

     Domestically, Norges Bank takes the view that there is diminishing spare

capacity and that earnings growth is likely to accelerate, supporting the case

for progressive tightening.

     With no new Monetary Policy Report due at the October meeting the central

bank has time before its economists have to provide another comprehensive

assessment of the outlook.

     The October meeting will be a stop-gap before the December forecast round

and there is nothing yet to suggest that the bank is not on track to a

first-quarter hike.

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

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