Norges Bank Review - September 2020: Caution Abound

Full PDF here: https://emedia.marketnews.com/marketnewsintl/MNINBankRevSep2020.pdf

Contents:
- Executive Summary
- Key Takeaways and Dates to Watch
- Summary of Sell-Side Analyst Views
- Exclusive Policy Analysis

Executive Summary:
• The Norges Bank kept rates unchanged, alongside expectations, at 0%.
• The Bank project a marginally steeper rate path forecast across 2022 and 2023, although the longer-end of the forecast horizon was lower.
• Inflation is seen quickening in the near-term, before moderating from mid-2021 onwards. The output gap is forecast to close at a faster pace than previously

Key Takeaways:

Only minor revisions to rate path, with priority on economic uncertainty over growing financial imbalances

Unsurprisingly, the Norges Bank made no change to current policy at September's rate decision, however they made some minor tweaks to the policy rate path and revised both inflation and output gap estimates higher. Notably, the Bank kept their view of financial imbalances unchanged this quarter, indicating that the Norges Bank do not currently see any spill over risk from higher-than-expected house price or household debt growth.

It was this factor that had led many to suspect that the Norges Bank could act to slow and partially reverse their expectations of mortgage rates falling further and remaining well below the pre-COVID average beyond the end of the forecast horizon. The fact that they didn't change their outlook on financial stability reinforces the cautious tone the Bank are looking to strike and the continued downside risk from the global pandemic.

Figure 1: Only minor changes made to rate path projections

Source: MNI/Norges Bank

Revisions to the rate path bring forward the probability of a full rate hike by the end of 2022 (with the uptick in inflation projections largely responsible) although the very far-end of the projection curve was revised slightly flatter. This was where the Bank made their largest single change to projections for an individual quarter, with 8bps trimmed off the forecast and making three 25bps rate hikes by the end of 2023 far less likely.

The Committee made further revisions to their deeply pessimistic output gap forecasts made in their Q1 2020 update, bring forward their forecast for the output gap to be more-or-less closed by a few quarters, with the economy now seen recovering at the beginning of 2023.

The market response was pretty sanguine. Some outside expectations of a hawkish tone were unwound, resulting in modest weakness for the NOK to sustain September's weakness against the EUR. With three months until the next projection update, the outlook for NOK will likely re-correlate with oil prices and global risk sentiment. Key risk events including Brexit, the US Presidential election and the global COVID caseload now take more importance for Norwegian markets than monetary policy.