MNI STATE OF PLAY: Norges Bank Sees "Somewhat Earlier" Hike

-Norges Bank Steers Towards Autumn Hike; Downplays Change In Target 

By David Robinson

     LONDON (MNI) - The Norges Bank left its key policy rate unchanged at 0.5%

Thursday and downplayed the impact on policy of its lower inflation target, but

gave a clear steer that a rate hike in the Autumn was on the cards.

     The Norges Bank stated that "it will soon be appropriate to raise the key

policy rate" with Governor Oystein Olsen providing a steer on timing, saying

that "the key policy rate will most likely be raised after summer 2018."

     The central bank's Monetary Policy Report (MPR) mixed caution over a

near-term hike, with inflation still well below target, with a clear message

that interest rates were heading higher, despite inflation currently

undershooting target. 

     Its interest rate projection showed that "the key policy rate will be

raised after summer 2018, followed by a gradual increase to around 2% around the

end of 2021," the MPR stated. That rate profile suggests tightening will come

earlier and the path will be higher than assumed in the December MPR.

     Norges Bank said that this higher interest rate path reflected a mix of

more elevated interest rates abroad and stronger domestic demand but this was

partially offset by lower than expected price and wage inflation.

     --NEW INFLATION TARGET

     Thursday's policy decision is the first since the Norges Bank saw its

inflation target cut to 'close to 2.0%' from 2.5% on March 2. The upward effect

of the lower target on policy is dampened because it came into force at a time

when inflation had been markedly undershooting the old, higher target.

     "In the near term, a lower numerical target implies a slightly less

expansionary monetary policy as actual inflation is somewhat closer to target,"

the MPR said.

     Further out, the lower inflation target should "see a somewhat lower

(nominal) rate in the longer term," the Norges Bank, with the real interest rate

rising throughout the projection period and turning positive around end 2021.

     "Because inflation is moving higher, the rise in the real interest rate

will be less than the rise in the key policy rate," the Norges Bank said.

     Headline inflation was forecast to rise to a touch over 2% by the end of

2021.

     The policy analysis and MPR appear to strengthen the case of those analysts

and market participants who were predicting a September hike and to weigh

against those predicting a year end move.

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

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