MNI STATE OF PLAY: Norges Bank "After The Summer" Hike Reprise

--Central Bank Seen On Hold At Thursday Meet, No Update To Rate Projections

By David Robinson

     LONDON (MNI) - The Norges Bank is set to reprise on Thursday its "after the

summer" line on a rate hike.

     The central bank April's policy meeting is likely an interim one, with

policy almost inevitably set to be left unchanged, with no new collective rate

projection published. Some soft recent activity data are unlikely to sway the

central view that summer will be fading before a rate hike becomes plausible.

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

risks suggests that the key policy rate will most likely be raised after summer

2018," Norges Bank Governor Oystein Olsen said on March 18 following the

previous policy meeting.

     At an April 6 conference in London, Olsen said that he was not going to

give any fresh hints on the policy outlook and with the central bank not

updating its full set of projections this month, the May 3 statement is likely

to be a holding one.

     --POLICY LEADERS

     The key determinant of market rate expectations for the Norges Bank's

policy rate is its in-house rate projections. The bank was ahead of the curve

among central banks in publishing interest rate forecasts. The Reserve Bank of

New Zealand led the way, producing its own rate forecasts in 1997, with Norges

Bank starting to publish them in 2005 and the Riksbank in 2007.

     A paper published by Norges Bank economists in April last year found that

market participants did shift interest rate expectations in the direction of the

published interest rate path, with revisions in the policy path affecting the

yield curve as far as 10 years out. At the May meeting, however, market

participants will be stuck with the March projections.

     These showed that the Norges Bank saw a pretty wide range of alternative

outcomes as 2018 progressed. By end June it put a 70% chance on the key 0.5%

policy rate being in a 0.03% to a 1.0% range and this widened to a -0.29% to a

1.45% range by end October. Using SEB calculations the implied probability of a

25 basis point hike by end September is 88%. 

     The are good reasons to suppose that the risks lie to the downside -- with

activity data from the European Union cooling and Norwegian inflation surprising

to the downside in the most recent print. 

     --MIXED DOMESTIC DATA

     Norway's key May activity data, first quarter mainland GDP, is not due

until mid-month. The March inflation figures, using headline CPI-ATE, came in at

up 1.2% on the year, down from +1.4% in February but up from 1.1% in January. 

     There has been no clear direction in the recent inflation data, with

CPI-ATE bobbing around in a 0.9% to 1.4% range since last July, after dropping

from 1.6% in both May and June last year. 

     The subdued recent inflation outturns are, in themselves, however not a

major deterrent to near-term hiking. 

     Olsen and his colleagues believe that Norway's output gap is closing and

that "rising capacity utilisation will probably push up price and wage inflation

further out," according to the March statement.

     With no press conference and no new forecasts on May 3, the debate over

whether Norges Bank will join the long list of central banks expecting, but

ultimately failing, to get policy rates on an upward trajectory is unlikely to

become any clearer this week.  

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

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