PREVIEW: Norges Set For March Hike, Caution Over Next Move

By David Robinson

     LONDON (MNI) - The Norges Bank's Executive Board will, near inevitably,

raise its key policy rate to 1.0% from O.75% Thursday but its collective rate

path and the associated commentary are likely to reflect a very cautious

approach to further tightening.

     The board stated after the bank's December forecast round and again after

its January meeting "that the policy rate will most likely be increased in

March." Activity and inflation data since then have come in stronger than

expected.

     A predicament for the Norges Bank is that it is tightening policy in

response to strong domestic data at a time when major central banks around the

world have eased policy, or at least lowered rate expectations, in response to

softer activity and inflation numbers.

     Norges officials acknowledge that foreign monetary policy restricts their

freedom of policy movement. Rapid krona appreciation could be harmful, with

exports of goods and services accounting for over a third of GDP.

     "The interest rate level abroad places limitations on the room for

manoeuvre in monetary policy in a small open economy like Norway," Norges Bank

Governor Oystein Olsen said in a speech last October.

     "An interest rate differential that becomes too wide can lead to

considerable exchange rate volatility, which will in turn feed through to

inflation, output and employment," Olsen said.

     The board must balance the need for a domestic hike now without driving up

longer-term interest rate differentials.

     One solution at this month's meeting would be to opt for a "dovish hike,"

lifting the policy rate now but lowering the collective rate path in its

quarterly Monetary Policy Report (MPR).

     The December MPR put a very high probability on a March hike, either 90 or

100%, with both options compatible with Norges Bank's quarterly rate profile.

The MPR suggested that there was only a very slim chance of a Q2 hike with a

greater than 50% probability of another in H2.

     It is a moot point whether the board, if it opts to flatten its rate path,

will push back the likely timing of the next hike or lower the path further out.

The December projection showed the policy rate rising to 1.0% in 2019, 1.4% in

2020 and 1.8% in 2021. If the board leaves another hike in place for the second

half of this year, it could push down the projections for 2020 and 2021.

     --DOMESTIC STRENGTH

     Since its last meeting in January, when the Norges Bank board cleaved to

its December rate projections and analysis, February's target CPI-ATE inflation

measure came in at 2.6%, compared to the central bank's forecast back in

December for 2.0%.

     The rolling three-month-on-three-month GDP measure came in at 0.9% in

December compared to the 0.7% forecast by the central bank, and at 0.8% in

January versus 0.7%.

     Norges Bank's own business survey, the Regional Network Report, found that

the economy was expected to stay robust, with output growth "firm over the next

half year" and that "enterprises estimate annual wage growth of 3.0% in 2019."

     Norges Bank will have to balance the domestic data against downside risks

from abroad, with the bank citing the triumvirate of trade tensions, Brexit and

the Chinese slowdown.

     "Norwegian businesses are part of global value chains. This means that

protectionist measures can spill over into the Norwegian economy even if Norway

is not targeted," Olsen said in a February speech.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

[TOPICS: MT$$$$,MX$$$$]