MNI STATE OF PLAY: Norges Set For Sept Hike Despite Krone

Norway's central bank is to reaffirm that it is likely to hike its key rate from 0% for the first time in the cycle in September, with unanticipated krone weakness insufficient to alter the policy outlook at its August meeting.

With no new forecast round and recent activity and inflation indicators not far out of line with the committee's previous expectations, the meeting of the Norges Bank's Monetary Policy Committee, culminating in Thursday's policy announcement, is an interim one.

The krone has, however, turned out to be a wildcard, as investors pare expectations for global economic recovery in the face of the rapid spread of Covid-19's Delta variant.

Norges Bank's trade-weighted I-44 exchange rate index stood at 111.38 on Aug. 17, almost exactly 5% weaker than the end Q3 forecast of 106.07 in the committee's June Monetary Policy Report. A higher number signals depreciation for the krone, which is seen by some investors as a petrocurrency.

Policymakers signalled a September hike when their June projections showed inflation staying below the 2.0% target on the core CPI-ATE measure through to the end of the three-year forecast period, rising from just 1.3% in 2022 to 1.6% in 2024.

The krone's recent decline should push up on import price inflation and lift inflation nearer to the 2.0% target but the previously forecast inflation undershoot will give the committee some freedom to look through currency related price effects.

FINANCIAL STABILITY

The committee has also linked the need for policy tightening to its financial stability concerns over continuing to maintain ultra-low rates, suggesting that the ebb and flow of the global Covid recovery and currency effects are unlikely to deter it from tightening.

It stated that "a long period of low interest rates increases the risk of a build-up of financial imbalances … [and] placed weight on the marked rise in house prices since spring 2020."

With the Norwegian housing market heavily reliant on variable-rate mortgages, research suggests that a modest policy rate increase may be enough to help dampen prices.

A softer than previously assumed global recovery could eventually show up in some flattening at the longer end of the committee's collective rate path to be published in September but that is not something that will be addressed at the August meeting.

For now, Norges Bank seems to be set on the tightening path, with governor Oystein Olsen also set to deliver a speech Thursday at 10:30 local time on the outlook for the Norwegian economy, which should help fill gaps in the relatively thin analysis that will accompany the earlier policy decision.