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MNI STATE OF PLAY: New Target Not Seen Swaying Norges Bank

MNI (London)
--Norges Bank Seen Leaving Policy Rate At 0.5%, Autumn Hike In Focus
--Seen Downplaying Lowering Of Inflation Target
By David Robinson
     LONDON (MNI) - The Norges Bank on Thursday will unveil its first policy
decision and commentary since its inflation target was lowered to "close to
2.0%" from 2.5% and its mandate revised on March 2, but analysts remain united
in the view that the central bank will leave policy unchanged. 
     Norges Bank governor Oystein Olsen stressed in a Feb 15 speech that the
bank's approach to inflation targeting has been flexible and the lower target
and altered mandate are not expected to trigger a mechanistic policy response.
     The Norges Bank has been a wholehearted backer of flexible inflation
targeting. When its target was set at 2.5% its projections showed a prolonged
inflation undershoot but Olsen and his colleagues used their discretion to tilt
the scales towards future tightening rather than the easing that the undershoot
suggested was warranted.
     "The inflation target horizon has been extended and monetary policy has
gradually become more flexible. This year, the policy rate may be increased for
the first time in seven years - this is a good sign," Olsen said in his speech.
     That rate hike warning came before the target was cut and Erica Blomgren,
Chief Strategist Norway at SEB, told MNI that she expected Norges Bank "to
downplay the effects of a lower target" in its commentary Thursday.
     As inflation was projected to undershoot the previous target the
anticipated rising rate path, without any alterations, it will end up being
better aligned with the new target. 
     "They are closer to the inflation target now," Blomgren said, adding that
the central bank will not have to signal more hikes just because of the
inflation profile.
     She now thinks "a September hike is likely," but this is because of the
stronger activity indicators and the closing of the output gap rather than the
inflation outlook.
     Headline inflation (CPI-ATE) has been weak, rising from 1.1% to 1.4% in
February and it looks more than likely to undershoot the Norges Bank's 1.6% Q1
     Capital Economics analysts said in a note that they expected the Norges
Bank to nudge its inflation forecast for 2018 down a touch from 1.7% but that it
would probably leave its 2019 projection at around 1.9%.
     The market focus, however, will not be on the inflation profile but on
whether the rate projections and commentary tilt the scales towards an earlier
     The case for an autumn hike seems to be gaining ground, and Thursday's
Monetary Policy Report published along with the interest rate decision should
help clarify the argument. 
--MNI London Bureau; tel: +44 203-586-2223; email:
[TOPICS: M$E$$$,M$X$$$,MX$$$$,M$$EC$]
MNI London Bureau | +44 203-865-3812 |
MNI London Bureau | +44 203-865-3812 |

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