MNI STATE OF PLAY: Norges Bank Reaffirms September Hike Likely

--Norges Bank Executive Board Leaves Key Policy Rate Unchanged At 0.5%

By David Robinson

     LONDON (MNI) - The Norges Bank's Executive Board left the key policy rate

unchanged at 0.5%, as expected, and reaffirmed that the key policy rate will

most likely be raised at the September meeting.

     The board took the view that the big picture outlook for the Norwegian

economy had not materially altered since it last published its full set of

economic forecasts in June and it again pointed to a September hike.

     In its assessment, the board noted that inflation on its target measure,

CPI-ATE, had risen faster than expected but was still below target. 

     In June the central bank predicted CPI-ATE would rise through the summer

months from June's 1.1% to 1.2% in July and 1.5% in Aug. The subsequent data

showed CPI-ATE hitting 1.4% in July and the Executive Board expects it to climb

eventually to target.

     "The Executive Board's assessment is that the upturn in the Norwegian

economy appears to be continuing broadly in line with the picture presented in

June. Underlying inflation is below the inflation target, but the driving forces

indicate that it will rise further out. Overall, the outlook and the balance of

risks do not appear to have changed substantially since the June Report," the

Board said in its assessment.

     --BIG PICTURE

     With the big economic picture materially unchanged, the vote to keep the

key policy rate at 0.5% was unanimous.

     The board said that economic developments among its trading partners had

been broadly as it expected but it did note the risk posed by trade wars and

political tensions which had fed through to falls in some currencies and equity

prices without, so far, altering the overall outlook.

     On the domestic front, employment growth was a little weaker than the

central bank expected, while unemployment continued to decline and the krone was

a little softer than the Norges Bank had assumed in June.

     Norges Bank only puts quarterly numbers on its collective policy rate path

forecast but it is possible to estimate the probabilities of a change at its

monthly meetings. In the latest quarterly economic forecast, published in June,

the central bank attached a negligible probability to a hike in August and put a

near 100% chance on a 25 basis point rise in September.

     The June policy assessment showed the output gap turning positive in 2019,

unemployment on the international standard labour force survey measure falling

from 3.7% this year to 3.3% in 2019 and to 3.2% in 2020.

     Against this backdrop the key policy rate was shown rising to 1.1% in 2019

and on up to 1.6% in 2020. Norges Bank's estimate of the neutral, or

equilibrium, policy rate was that it would reach 1.1% in 2019 and 1.6% in 2020.

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

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