MNI STATE OF PLAY (RPT): Norges Bank Set To Hike

(Repeats story originally published on March 22)

Norges Bank looks nearly certain to deliver its well-trailed 25-basis-point hike on Thursday following its March meeting, and could steepen its collective rate path to show four or even five rate hikes this year.

When it hiked its policy rate in December, Norway’s central bank said its next increase would most likely be in March, and its business survey released March 15 has since showed higher wage expectations and capacity shortages at their highest level since before the Global Financial crisis. This would imply that more rate increases are likely to be in store than the three previously anticipated.

But, while some analysts have suggested it might move to anticipating five hikes, Norges, which began tightening earlier than other advanced economy central banks and has sought to be predictable, could also opt to keep restricting itself to rate increases alongside its quarterly forecast rounds. That would cap the rise in the rate path to 1.5% by the end of 2022.

CONFLICTING FACTORS

The central bank’s economists will have to consider factors pulling in both directions on their forecast. Downgrades to growth projections for Norway’s trading partners, higher krone money market risk premia and a stronger currency must be weighed against higher domestically-generated inflation. While currency appreciation, linked to higher oil prices, will weigh mechanistically on import prices, accelerating goods inflation overseas will push in the opposite direction.

In December Norges Bank projected CPI-ATE, the target inflation measure, meeting its 2.0% goal by 2023 and staying there. The new forecasts this month are likely to show it rising more rapidly, but the 2022 and 2023 growth forecasts, at 4.3% and 2.5%, will be under downward pressure.

In December, Norges Bank forecast 3.2% annual wage growth in 2022, and its Regional Network survey, primarily conducted from the end of January through to Feb. 18, found business anticipated 3.7% growth. Central wage negotiations are currently stalled, raising more questions about the likely outcomes.

Given such uncertainty, analysts’ expectations are widely dispersed, from those seeing Norges Bank struggling to get its policy rate above 1.5% to those expecting quarterly tightening continuing through 2023 to as high as 2.5%.