MNI STATE OF PLAY: Norges Bank Seen Holding To June Hike Line

Norges Bank is likely to leave policy on hold at May’s interim meeting this week, and to continue to signal that it will hike at each quarterly forecast round meeting.

The Monetary Policy and Financial Stability Committee raised the policy rate by 25 basis points in March to 0.75% and said it was most likely to be raised further in June. Since then March inflation surprised to the downside and pay negotiations matched Norges Bank’s forecasts, suggesting little pressure for a surprise hike with policymakers instead free to reassess the picture in the June forecast round.

Inflation in March on the target CPI-ATE measure, which excludes energy prices, came in at 2.1% compared with the 2.5% forecast in Norges Bank’s March Monetary Policy Report. Headline CPI in March also undershot expectations, coming in at 4.5% against the projected 4.9%.

Economists at Norway’s central bank have highlighted how core measures that exclude energy prices are less reliable guides to trend inflation if there are enduring increases in energy bills for consumers and businesses.

FASTER TEMPO IF NECESSARY

In a MNI interview after the March hike Norges Bank’s new Governor Ida Wolden Bache left the door open to hiking more rapidly than 25 basis points a quarter. The trigger for accelerating the pace of hikes, however, would be evidence of inflation rising faster than expected, something not happening so far.

Having moved ahead of other advanced economy central banks in the tightening cycle, Norges Bank looks like it will be able to proceed with its gradualist approach, at least for now.

The latest manufacturing sector pay deals came in at 3.7%, matching Norges Bank’s forecast for 2022 annual wage increases.

One change feeding into upside inflation, though, is that the Norwegian krone has weakened on the import-weighted I-44 measure used by the central bank. On May 2 it stood at 108.99 compared to the Bank’s 105.1 forecast for 2022, where a lower reading indicates an appreciation.

The announcements by Norges Bank of purchases of foreign exchange on behalf of the government equivalent to NOK 2 billion per day in April and May have weighed on the currency, but the moves so far appear marginal for monetary policy purposes.