MNI STATE OF PLAY: Norges Bank Hike On Track When Sept Comes

By David Robinson

     LONDON (MNI) - Norway's economic outlook has brightened and the Norges

Bank's June meeting is likely to end with a bolstering of it expectations for a

September rate hike.

     With business expectations upbeat and the Norges Bank reckoning that a mere

sliver of economic slack remains, the likelihood is that the board will reaffirm

its guidance that the key policy rate "will most likely be raised after summer

2018." The Executive Board's policy decision will be unveiled Thursday,

alongside the quarterly Monetary Policy Report (MPR). 

     The key policy rate has been at 0.50% since March 2016 and with recent

inflation outturns below target and weaker than the Norges Bank had forecast,

policymakers have no reason to want to spring a surprise and hike at their June

meeting. Instead, with activity data firming and capacity constraints biting,

Governor Oystein Olsen is very likely instead to repeat his line that a rate

hike is drawing near.

     Olsen is likely to note the downside risks that are haunting policymakers

-- of increased protectionism as a result of the US administration's bellicose

approach to trade and of a deceleration in euro area growth. 

     In its previous quarterly projections, published back in March, the Norges

Bank forecast that the output gap would move from negative territory, -0.26% of

GDP at the end of the second quarter of this year, to positive territory in the

first quarter of 2019. 

--CLOSING OUTPUT GAP

     Olsen said that Norges Bank's March projections showed that "the output gap

for Norway is closing. Underlying inflation is low, but rising capacity

utilisation will probably push up price and wage inflation further out" and

following the May meeting the Executive Board said that the balance of risks did

not appear to have changed substantially since then.

     The most recent data have shown weaker than expected headline inflation but

have also pointed to accelerating growth and rising capacity constraints, which

are compatible with the picture of rising domestic inflation pressures.

     The central bank's regional network report, published this month, showed

more widespread capacity constraints, most markedly in manufacturing and

construction, while business output expectations for six months ahead rose to

their highest level since September 2012.

     The Norges Bank's business contacts estimated annual wage growth would be

2.8% in 2018, up from 2.7% in the previous survey, with selling prices expected

to rise over the next 12 months.

     When all the latest data is fed into the central bank's model and

developments analysed, the Executive Board is likely to sign off on a collective

rate projection that is very close to, and maybe a touch higher, than its March

one. 

--PROBABILITIES

     The Norges Bank only publishes quarterly averages for its key policy rate,

with the March projections showing it rising from 0.50% to 0.58% in the third

quarter and 0.76% in the fourth quarter. By taking those quarterly averages and

fitting them with the policy meetings, it is possible to estimate the

probability of a hike at each meeting, although the central bank itself is not

so precise.

     Erica Blomgren, the chief Norway strategist at SEB, assessed that the

implied chance of a September rate hike in the March Norges Bank forecast was

20% in June and 88% in September. Thursday's updated forecast could see this

pushed a shade higher, with risks remaining symmetrical around the forecast.

     Of significance for the central forecast will be softer inflation outturns

but Norway's domestic issues, with skill shortages, atrophying spare capacity

and anticipated rising output, are likely to be enough for the Norges Bank to

leave its guidance in tact and the door wide open to a September hike.

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

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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