Norges Preview - July 2020: ECB On Autopilot As The List of Questions Grow

MNI Point of View:

Bank to reinforce lower-for-longer message, but negative rates a step too far

The Norges Bank's lower-for-longer message was hammered home at May's policy meeting, at which the Bank renewed their rate path projections to see no move on the rates out to the end of the forecast horizon at Q4 2023. It's likely the Bank will reiterate and stress this theme at Thursday's meeting, but will stop short of suggesting any possibility of negative interest rate policy.

The lower-for-longer rate path projections are likely to come despite economic data generally printing toward the more optimistic end of the Norges Bank's scenario analysis as outlined in the May report. Core inflation metrics are of particular interest, with the Bank's preferred CPI-ATE measure holding at 3% in May as currency weakness skewed import prices.

Olsen and the board will look through this upside pressure on inflation for now, with more troubling signs from their GDP projections and the Regional Network Survey making the Bank far more tolerant of above-target price rises. Their own forecasts see the domestic economy not reaching its pre-COVID peak until Q3 2022.

Unlike other global central banks, it's unlikely the Norges Bank will suggest that they could consider negative interest rate policy at any point across the forecast horizon. In recent speeches, governor Olsen made it clear that the Bank have noted the negative rates debate among its peers, but the smooth functioning of financial markets is now a priority and as such "The Committee does not envisage making further policy rate cuts".

Secondly, it's clear that the cumulative 150bps in rate cuts this year are already having the desired effect on consumption and the domestic economy. In recent weeks, the Bank have already flagged that consumer spending on goods has been running higher than the comparable period in 2019 and the drop in spending on services is swiftly being reversed.

It's likely that these factors are behind the Norwegian money market pricing in a decent chance of a 25bps rate hike by the end of the forecast horizon, despite the Bank's flat rate path.

• Dovish risk: Any signal that the Norges Bank would consider negative interest rates across the forecast horizon would be a considerable dovish surprise. The market response would likely be aggressive selling pressure in the NOK and a re-pricing of policy rates in money markets.
• Hawkish risk: There remains an outside risk that the Norges Bank could tie their rate policy with other economic indicators including the labour market. With oil prices now more stable, Norway is seen recovering at a quicker pace than its peers, meaning Norwegian rates could rise sooner-than-expected – albeit not until the tail-end of the forecast horizon.

Click here for the full Norges Preview or see attached below:

NorgesPrevJune2020.pdf