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Norges Review - June 2020: Norges Bank Abandons Its Crisis Rate Path

MNI (London)

Executive Summary:

  • The Norges Bank kept rates unchanged, alongside expectations, at 0%.
  • The Bank surprised markets by projecting rate hikes before the end of the forecast horizon, seeing rates reaching 0.5% in 2023.
  • Policymakers are optimistic over Norway's economic recovery, shifting estimates to show a sharper recovery happening sooner than expected.

Key Takeaways:

Against the expectations of all analysts surveyed, the Norges Bank surprised markets in June, taking an unexpectedly positive view on the economic prospects for Norway post-COVID crisis. This led to projections showing a shorter downturn, a sharper recovery and a quickly shrinking negative output gap in the years ahead.
Given the optimistic outlook, Governor Olsen raised the likelihood of rate hikes as soon as 2022, with a full 25bps rate hike evident in the projections by the end of that year.
On growth, the Bank have now taken the view that Norway will reach pre-crisis output levels by Q3 2021, bringing forward this view by six months from the May economic update. Ahead of this week's decision, board members appear to have increased their focus on realtime economic indicators and gauges for household finances including debit card use (Ida Wolden Bache: Projections and monetary policy in the time of Covid-19 – May 26th), house price indices and mortgage rates. These could take more focus in the gaps between the Bank's preferred RNS surveys.
Despite the Bank's May projections, money markets had already been pricing a decent chance of a 2023 25bps rate rise before June's policy decision, which may go some way in explaining the relatively muted market response Thursday. The NOK rallied nicely in minutes following the release, but these moves were reversed well ahead of the market close. Forward points are more informative, with tenors capturing the revised projections gaining in sympathy.

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