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Norges Bank will weigh improving activity data against currency strength as it considers providing clearer guidance on the timing of its first rate hike of the cycle at its meeting on Thursday, with investors seeking clues as to whether the increase due at some point in H2 could come in September.
It looks to be a close call for the Monetary Policy and Financial Stability Committee, and moving the collective rate path to push up the odds on a September hike above 50% while stopping short of fully pricing in a 25-basis-point increase from the current 0% would seem a possibility.
To date, Norges head Oystein Olsen has said nothing to sway markets either towards or away from a possible hike in September, when the next forecast round will be completed
Recent activity data and elevated house prices appear supportive of an earlier rate increase, especially given the committee's dual monetary and stability mandate. But krone strength and accompanying weak import price inflation mitigate tightening pressure, with the target CPI-ATE measure coming in at 1.5% in the year to May, below both the Norges Bank's 1.9% prediction and its 2.0% target.
The central bank's business survey showed firms expecting wage growth to accelerate more rapidly than it anticipates, with the estimate for this year raised to 2.7% from 2.3% in the previous survey. The March MPR projected wage growth at 2.4% rise in 2021.
The survey found firms in every sector optimistic activity would accelerate in the coming six months.
While the speed of the krone's appreciation may have caught policymakers by surprise, its recent sideways moves at more elevated levels appear to be pretty close to the bank's assumptions.
The March monetary policy report showed the krone appreciating slightly from its then level of 107.87 according to its I-44 import weighted index to 107.3 during 2021 and 106.4 in 2022. The index recorded 107.56 on June 14. A lower number indicates a stronger krone.
CPI-ATE was projected to remain below the 2.0% target at 1.3% in 2022 and 1.5% in 2023.That was conditioned on the policy rate rising from its current zero percent to reach 1.3% at the end of the three-year projection, with one hike this year and at least two next.
If the committee does tilt the scales a little towards earlier tightening it could leave the remainder of the rate profile broadly unchanged and then revisit the question of whether to add in extra tightening in its September forecast round, when Covid uncertainties in advanced economies may have lessened as vaccine programmes near completion.