MNI STATE OF PLAY: Norges To Choose Between 25-, 50-BP Hike

Norway’s central bank is set to deliver another rate hike at its June meeting as its inflation outlook continues to rise, either upping the tempo of tightening by announcing a 50-basis-point increase on Thursday, or staying at 25 points while releasing a projection indicating rates will rise more quickly than it had foreseen in March.

When hiking from 0.5% to 0.75% on March 23, Norges Bank’s Monetary Policy and Financial Stability Committee stated that the next move up would most likely be in June and it projected that the policy rate would rise to around 2.5% by the end of 2023. New Governor Ida Wolden Bache told MNI however that hikes could be in larger increments if needed to control inflation. (See MNI INTERVIEW: Norges Bank Head Says Could Up Tempo Of Hikes)

Other global central banks have since revised inflation forecasts higher, and Norges Bank, which has seen its March inflation forecasts outpaced by reality, is likely to follow suit, though it will also have to factor in the growing risk of recession in Norway’s major trading partners. Consumer prices jumped by an annual 5.7% in May, compared to Norges Bank’s forecast of 4.3%, and the target CPI-ATE measure rose 3.4% versus the 2.6% projection.

Norges Bank’s previous rate path pointed to a couple of hikes in the second half of the year but if the forecasts published in the June Monetary Policy Report were to price in a third, then this would signal a shift to a policy of hiking at interim meetings, which are not accompanied by the detailed analysis contained in the quarterly MPR or by a press conference.

NO SURPRISES

While analysts are split as to whether this week’s hike will be by 25 or 50 points, so far Norges Bank has delivered no surprises, with its previous 25-basis-point hikes clearly flagged in advance. Another 25-point increase this time round and a clear statement that the next move is likely in August would continue this approach.

Recent data has highlighted the dilemma facing policymakers. Norges Bank’s Regional Network, published this month, found businesses expected growth to decline over the next six months, but also that they thought the tighter monetary policy needed to contain quickening inflation would dampen demand. A growing number reported capacity constraints, while expected wage growth for 2022 was revised up to 3.9% from 3.7%, though even this higher rate is still modest by the standards of Norway’s peers.

Money market curves, as elsewhere, are pricing in more aggressive tightening than either analysts are expecting or than the central bank has, so far, signalled. On some readings the curve indicates that the policy rate will rise over 3%, with the equivalent of more than half a dozen 25bps increases this year.