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Revised Budget Seen Bolstering Norges' Need for Hikes

NORWAY
  • The expansive nature of this morning's budget revision is seen bolstering the need for further hikes from the Norges Bank in the coming months - particularly the larger non-oil budget deficit. The deficit has been revised higher to 3.0% of pension fund capital - greater than the Norges Bank assumption of 2.8%, and therefore should add upside pressure to rate path projections going forward.
  • The March MPR saw rates peaking at 3.60% in Q4, but broad NOK weakness and stubborn core CPI could tilt this closer to 4.00% at June's forecasting round. Most sell-side analysts see today's budget release bolstering the case for more hikes: e.g. DNB affirm their forecast for 4% peak in Sept.
  • The specific implications for NB FX selling/buying remain to be seen, but the larger deficit should equate to a slower pace of CB NOK sales on behalf of the government - cementing the market assumption for FX purchases to slow (and possibly reverse) in the coming months.
  • EUR/NOK holds just above 11.4556 support (50-dma), but a break below would open further corrective activity toward 11.3582 and below. Any NOK rally would have to run further to meet the Norges Bank's FX expectations from March: The Q2 I-44 FX rate average so far is 121.46, over 1.5% off the 119.50 assumption.
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