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August Meeting of Little Consequence, Bank to Wait Until September Projections

Figure 1: Rate path projections surprisingly edged higher in June

Source: MNI/Norges Bank

MNI Point of View:

  • June's policy projections were a surprise, with the Norges Bank going against the tide of other global central banks and specifying a date by which they expect to begin tightening policy. With this month's decision restricted to just the announcement on rates and a small policy statement, the Norges Bank will wait until September before shedding any more light on their policy intentions.
  • There remain both upside and downside risks to the Norwegian economic recovery, with bouncing oil prices and a bubbling property market on one hand, and the threat of a second COVID wave and a retrenchment of consumer spending on the other. How the executive board judge these risks will be evident in any revisions to the rate path projections in September.
  • Alongside the more hawkish rate path in June, the Bank cemented their stance that they don't see the deployment of negative rates as a viable solution to any future downturn: "the Committee does not envisage making further policy rate cuts". Barring any very considerable downside risks this year, that is to remain the case.
  • That's not to say the Bank don't have other tools at their disposal. Despite the bank removing the two-way risk to rates, there are policy measures available to ease financial conditions in any future recession (COVID-induced or otherwise). On August 14th, the bank extended the deadline of their extraordinary F-loans program to the end of 2020 and warned that the offerings of the F-loan program could be adjusted at short notice "if market conditions so warrant". This should protect Norwegian markets from any meaningful liquidity shortage in the coming months.
  • This leaves the Norwegian economy well poised to follow the Bank's forecasts, narrow and close the output gap over the coming two years, and justify higher policy rates.

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