MNI STATE OF PLAY: Norges Eyes March Meet Tightening Signal

Norges Bank, at the front of the central bank pack on the tightening path as the economy emerges more strongly from the Covid pandemic than feared and house prices sizzle, could bring forward the first projected rate hike from the first quarter of 2022 into the final quarter of this year at its March meeting.

Market pricing already suggests Norges will start tightening in late 2021 and analysts anticipate it will raise the entire profile to show the policy rate at 1.25% or above at the end of its three-year forecast period.

Norges will also update its quarterly forecasts when it announces its decision on Thursday, with recent data showing that the contraction in 2020 was less sharp than the central bank had anticipated. In December, it had expected the output gap to be almost closed by mid-2022 and the policy rate starting to rise from its current 0% in the first quarter of next year to reach 0.93% at end 2023.

The March meeting and forecast round will give policymakers their first chance to factor into the outlook the USD1.9 trillion fiscal stimulus package and the rise in yields around the world.

COMMUNICATION CHALLENGE

But any compression of the Bank's tightening timeline will present communications challenges at a time when Covid infections are rising again, Norway's borders remain closed and a patchwork of local social distancing restrictions are set to weigh on economic activity in the first quarter and into the start of the second.

In his Feb. 18 annual address Governor Oystein Olsen highlighted the risks of unemployment becoming entrenched at higher levels and stressed the need for expansionary monetary policy, saying that the Norges Bank would only seek to normalise it "once there are clear signs that economic conditions are normalising."

Norway's central bank has an its integrated Monetary Policy and Financial Stability Committee, so rising house prices also crop up in the monetary policy debate.

WARNING

Olsen warned that persistently low interest rates could add to financial imbalances and that "rapidly rising house prices and further household debt accumulation pose a particular risk."

House prices were up 7.1% on the year in the fourth quarter and up 4.8% on the quarter alone in Oslo.

The latest Treasury-backed review of the central bank, Norges Bank Watch, highlighted the lack of a clear framework for the bank's decision making, stating that "the trade-off between flexible inflation targeting and financial stability remains unclear."

Some analysts cite the housing market as a factor that could tilt the scales to earlier tightening but it is not clear what weight the central bank will place on it as it debates whether to signal a hike this year.