MNI STATE OF PLAY: Norges On Track For September Hike

Norway's central bank signalled on Thursday it is on track to hike in September, with the domestic economy evolving largely as anticipated and rising foreign inflation and a sharp krone depreciation pointing to upside price pressures.

The decision by Norges Bank's Monetary Policy and Financial Stability Committee decision to leave its policy rate on hold at zero and to restate guidance that a hike was likely in September came as no surprise. Its updated forecasts showed domestic economic activity running slightly stronger than expected in June following the removal of Covid restrictions and headline inflation close to expectations.

The committee has long-standing concerns over the impact on financial stability of a prolonged period of ultra-low rates, and noted that while the target core inflation CPI-ATE measure inflation was just 1.1% in July, CPI came in at 3.0% while "the rise in prices for imported consumer goods has been a good deal faster than projected."

KRONE WEAKNESS

The decline in the krone may reflect uncertainty over the global economic outlook as the Covid Delta variant spreads, the committee said, noting that oil prices had held roughly steady in recent months and natural gas prices had risen.

"Long-term interest rates have fallen after the emergence of new virus variants has created uncertainty regarding the economic outlook," it stated.

Market attention will now centre on the committee's outlook for the timing of a second hike and subsequent rate increases when it releases its next set of forecasts in September, when it is likely to hike by 25 basis points.

In its June projections it raised the terminal policy rate, the rate at the end of its three-year forecast period, to 1.56%, with the curve factoring in an additional hike compared to March. But longer-term rate expectations have since fallen as global uncertainty has risen.