MNI STATE OF PLAY: Norges Bank To Stick To Q1 Hike Projection

By David Robinson

     LONDON (MNI) - The Norges Bank Executive Board will likely stick to its

projected rate path showing a hike in Q1 next year when it unveils its policy

decision and Monetary Policy Report (MPR) containing economic forecasts on

Thursday.

     Since the September MPR there have been sizeable data surprises both to the

upside and downside and the board may well decide it's been a wash. With the

labour market tight and businesses reporting growing labour shortages the board

looks set to stick to the line that the key policy rate, currently at 0.75%,

should rise by 25 basis points by the end of March.

     The latest data showed mainland, or non-oil, GDP growth decelerating

rapidly on a three-month basis, from 0.8% in May through July to 0.3% in July

through September and on down to 0.2% in August through October. November

inflation, however, spiked, reaching 2.2% on the year on the targetted CPI-ATE

measure, which excludes taxes and energy products.

     --SOFTER GROWTH

     This meant that while growth has been softer than Norges Bank expected,

near-term inflation has been higher. The September MPR had projected quarterly

mainland GDP growth of 0.7% in Q3 with CPI-ATE inflation rising from 1.6% in

October to just 1.8% in November.

     A key point for the executive board is that the central bank's business

survey, the Regional Network Report, portrayed an economy pushing up against

capacity constraints, with worsening labour shortages and the expectation that

pay growth would firm in 2019.

     In an interview with MNI in late October, board member Jon Nicolaisen said

that they were expecting a rise in nominal wage growth and "a good rise in real

wages", which made Q1 the most likely point for the next hike. Nicolaisen's big

picture appears to be undisturbed and he described the volatility in consumer

price data as "short-term noise."

     The drop in oil prices, which for Norway as a major producer hits both

inflation and revenues, is fuelling volatility. Spot crude is down by around a

fifth since the September MPR but there are offsetting factors, including the

decline in the krone.

     The inputs to the Norges Bank's central growth and inflation projections -

the currency and oil price change and the starting point for inflation and

growth - will all be altered. Some of these changes will be offsetting, and the

board is likely to focus on the evidence of mounting domestic inflationary

pressure.

     --LABOUR SHORTAGES

     The Regional Network Report stated that "The share of enterprises reporting

full capacity utilisation has risen and is now slightly higher than its

historical average. The share of enterprises reporting labour shortages has also

risen."

     Against this backdrop, businesses reported average annual wage growth of

2.8% this year, nudging up to 2.9% next year, with service sector wage growth

expected to come in at 3.1% in 2019. If inflation falls back as expected to

around the 2.0% target that would leave around a full percentage point of real

earnings growth.

     Annualised growth over the next six months was projected to come in at

3.0%, indicating that the deceleration in the second half of this year is

expected to be transient.

     The MPR will doubtless again highlight downside risks from outside Norway,

with slowing euro area growth and rising global protectionism likely to crimp

export growth.

     In the September MPR Norges Bank said: "Higher trade barriers and

persistent uncertainty may weigh on import growth among Norway's trading

partners, but may also lead to the krone remaining weaker than assumed."

     Krone weakness will push up on inflation and the mix of softer growth and

higher inflation could be reprised.

     The headline policy guidance from the Executive Board, however, is likely

to be one thing that remains constant in Thursday's Norges Bank projections and

pronouncements.

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

[TOPICS: MT$$$$,MX$$$$]