MNI STATE OF PLAY: Norges Bank To Hike, 50 bps On Table

The Norges Bank looks set to hike its benchmark rate Thursday, with at least a 25 bps hike seemingly nailed on and a fairly good chance that a bigger 50 bps hike finds favour amongst policymakers.

The August policy meeting is deemed an interim one, with no new public forecast round and no press conference following the decision announcement. That could tilt the scales towards the 25 bps hike that the bank’s Monetary Policy and Financial Stability Committee projected in its June rate path.

However, back in June, the bank's economists clearly under-estimated near-term inflation outcomes and any acceleration from that guidance could be explained by Governor Ida Wolden Bache in a speech also scheduled for Thursday.

GOVERNOR OPENED DOOR

When Norway's central bank hiked 50 bps in June the central's bank projections were clear, and were, as Wolden Bache said in an MNI interview following the June announcement, seen as “consistent with sequential 25-basis-points moves at all meetings remaining this year”. At the time of the interview, there were four meetings including the August gathering left this year, suggesting a further 100bps of easing, although Bolden Wache did leave the door ajar to faster increases (MNI INTERVIEW: Norges Set To Hike By 25Bps A Meeting- Governor).

“Obviously there is great uncertainty surrounding that forecast and the committee will make a full assessment each meeting to assess the risks on the outlook and to make the decision as appropriate. We can’t exclude the possibility, of course, that we might need to do more,” she stipulated.

Now, at the first meeting since June, analysts are divided over whether the central bank will stick to its previous projection or step up the pace.

INFLATION SURGE

The July inflation prints, compared to the central bank's forecasts, were shockingly high. The 12-month CPI rate was 6.8% and the target CPI-ATE rate 4.5%, compared with the 5.1% and 3.2% predicted in June Monetary Policy Report. The MPR did show CPI climbing to 5.4% in August and CPI-ATE to 4.2%, but even these peaks would be below the July outturn.

Registered unemployment in Norway has been exceptionally low, with Norges Bank forecasting just 1.8% in 2022 and 2023. Many employers reported hiring difficulties, and the central bank believes the economy has significant excess demand, projecting a positive output gap of 2.0% in 2022 and 1.4% in 2023.

Against this backdrop the case for further tightening is clear but the question remains over the pace. The currency has strengthened compared to its level in June, which will push down on import-related inflation.

At the same time, part of the currency strength reflects the higher probability markets have placed on accelerated tightening the central bank will have to decide this week whether to validate those expectations.

The import weighted I-44 krone exchange rate index that Norges Bank devised stood at 108.97 on August 15 compared to 113.57 a month ago, a 4% rise (a fall in the index represents an appreciation).