MNI STATE OF PLAY: Norges Bank On Track For H2 Hike

With no new full forecast round to inform its May meeting and with an eye on financial stability risks and above-target Q1 inflation, Norges Bank looks set on Thursday to reassert guidance that it will become the first developed world central bank to hike in this cyle, with an increase in its official rate coming in the second half of the year.

While probabilities assigned in June's upcoming collective rate projection could be tweaked if the Monetary Policy and Financial Stability Committee wishes to signal a hike earlier in the second half than previously indicated, there has been no substantive improvement to the growth outlook since the March forecasting round. The committee's joint mandate including financial stability, it will be mindful of rising property prices and fragility in the commercial real estate sector.

The March Monetary Policy Report suggested the policy rate would stay close to its current zero until the end of the third quarter, and then rise gradually to 0.5% in 2022 and 1.3% by the end of the forecast horizon in 2024. The committee's collective rate path showed it opting for slower tightening than implied by the Norges Bank's model, whose results were also published, with members prepared to wait to see the recovery becoming more firmly entrenched before acting.

KRONE STRENGTH

The krone, after hitting record lows when Covid struck in March 2020, has outperformed central bank expectations for a modest appreciation. Norges Bank's import weighted currency index, I-44, which was at 115 in 2020, was in March forecast by the central bank to strengthen to 107.3 during 2021m but had already reached 106.4 by May 4and 106.4. A decline in the index indicates appreciation.

The CPI-ATE inflation measure, which excludes energy prices, has moved significantly above the committee's 2% target, holding at 2.7% in March, though that was in line with the central bank's forecast.

In March, Norges said that krone appreciation and prospects for moderate wage growth should push inflation rapidly below target, to 1.9% in May, and to stay below target, at 1.3% in 2022 and 1.4% in 2023. The central bank will have time to revisit these assumptions in the full June forecast round, by which time Norwegian authorities will also have decided whether to recommend the use of the AstraZeneca Covid vaccine, potentially speeding economic reopening and recovery.

In its March forecasts, Norges was already upbeat on vaccine rollout, assuming coverage of over 80% of the populace by the end of August.