MNI STATE OF PLAY: Norges Bank Won't Stray From Sep Hike Path

--Having Signposted Sep Hike, Norges Bank Won't Deviate At Aug Meet

By David Robinson

     LONDON (MNI) - The Norges Bank Executive Board has signalled it will hike

its key policy rate in September and as there has been no sudden shift in the

data flow it is extremely unlikely to be tempted to stray from its chosen path

at its August meeting.

     The next rate decision announcement, on August 16, will likely declare the

key policy rate unchanged at 0.50%, with a 25bps hike likely in September. The

near zero chance of an August hike reflects policymakers' preference to clearly

signal their next step and to move in a quarterly forecast round month rather

than any compelling case for waiting a month to see how the data unfold.

     In its June assessment, the Executive Board stated that its "current

assessment of the outlook and balance of risks suggests that the key policy rate

will most likely be raised in September 2018."

     The implied probabilities attached to that outcome in the June Monetary

Policy Report set out starkly how unlikely the central bank assumed an August

hike was and how certain a September one was.

     --PROBABILITIES

     The Norges Bank's projection back in June for the key policy rate in

September was 0.58%. That policy rate was the average of the monetary policy

rates for the three months in quarter three and plausible probabilities can be

assigned to individual months.

     As there was no meeting in July, the assumed monetary policy rate for last

month would have been 0.50%.  Assuming a 25bps hike in September means the

policy rate for August must be a number that leads to an average for the three

months of 0.58%, and a 0.51% rate solves this equation -- that is a hypothetical

1 basis point hike.  

     "What Norges Bank did in June was to eliminate any probability in its rate

path for a rate hike in August and to put 100% probability for a move in

September," Erica Blomgren, Chief Strategist Norway at SEB, told MNI.

     Those odds imply the August meeting will be a sideshow. With a hike almost

ruled out, attention will focus on the bank's policy statement, which looks set

to reaffirm a September hike as the most likely outturn.

     --DATA SET

     The economic data since June, showing subdued underlying inflation on the

target (CPI-ATE) measure and rising employment were in line with Norges Bank's

forecasts. The central bank's June forecasts showed CPI-ATE on a very gently

rising path, climbing to a little above the 2% target at the end of its three

year forecast horizon, driven up by the looming removal of any spare capacity.

     The outlook for onshore activity looks rosy with manufacturing sentiment

hitting its highest level since 2010. The August commentary will give the

central bank the chance to comment on what effect increased trade tensions are

likely to have, but at this early stage Norges Bank is more likely to follow in

the footsteps of other central banks and treat them as a downside risk rather

than having them pull down the modal growth path.

     August, therefore, looks set to be a staging post, with the debate set to

focus on what will happen after a September hike.

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

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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