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Fast Comment NorwayNorges Bank to reinforce expectations of September hike

  1. Norges Bank to keep policy rate unchanged in August, in line with strategy
  2. Summer months are volatile - picture broadly in line with Norges Bank's forecast
  3. Norges Bank to indicate rate hike in September
Norges Bank to keep policy rate unchanged in August, in line with strategy
Norges Bank’s Executive Board will meet on Thursday, August 16, to decide on monetary policy. There is no press conference after the August meeting; the central bank’s policy rate decision will be followed by a brief press release and a short assessment from the board about economic developments since June. In our view, it is as good as certain that the policy rate will be kept unchanged, at 0.5 percent. Data since the June meeting has been scarce. Furthermore, the board never deviates from strategy at meetings in between monetary policy reports unless something extraordinary has happened.
Summer months are volatile - picture broadly in line with Norges Bank's forecast
Since June, numbers for industrial production have come in considerably below market expectations, with the trend now looking weaker than what could have been expected given the weak NOK exchange rate and the improvement in the supplier industry. Manufacturing sentiment has been mixed, with the PMI dropping below 50 in July, but with the Q2 manufacturing confidence indicator pointing to continued optimism. Retail sales for June came in much weaker than expected, but numbers were probably affected by the unusually warm summer weather. The development in the labour market seems slightly on the weak side of Norges Bank’s expectation. The LFS unemployment rate increased to 3.8 percent in June from 3.7 percent in May. Registered unemployment increased to 2.5 percent in July, much higher than expected. However, according to NAV, this was mostly due to technical reasons, as data was collected unusually late in the month. When adjusted for the delayed data collection, unemployment rose only marginally in July. However, this still implies that the downtrend in registered unemployment has continued to slow. All in all, the data on the real economy seems to be somewhat on the soft side of Norges Bank’s forecast, but summer data is very volatile, so we believe it is too early to conclude that the trends really are weaker. Inflation has come in slightly higher than Norges Bank’s forecast with June inflation in line with the central bank’s expectation while the 12-month growth rate in CPI-ATE in July was 1.4 percent, whereas Norges Bank had expected 1.2 percent. The NOK exchange rate, as measured by the import-weighted currency basket I44, is some 1.4 percent weaker than Norges Bank expected so far in Q3, and this factor would in isolation suggest tighter monetary policy as it implies higher imported inflation and exports ahead. On the other hand, money market spreads are somewhat higher than the central bank expected so far in Q3, which in isolation suggests looser monetary policy. Foreign interest rate expectations are mostly unchanged since June, as is the spot price for Brent oil. However, the futures prices for oil with delivery at the end of Norges Bank’s policy horizon (Dec 2021) are some 3 dollars higher per barrel.
Norges Bank to indicate rate hike in September
Due to the volatility of summer-month data, we believe the deviations from Norges Bank’s forecast would need to be larger than what we have seen for the board to deviate from its strategy. We therefore expect the board to conclude that the picture is broadly unchanged since June and that the policy rate will be left unchanged, in line with the June strategy. However, as the central bank in June said it expected the policy rate to be hiked in September, and this is now only a month away, the board will most likely comment on what it foresees for the immediate future. We believe Norges Bank, either directly or indirectly, will reiterate the board’s intention of hiking the policy rate in September, assuming that the economy continues to develop as the central bank expects.

Disclaimer

Kari Due-Andresen

Chief Economist Norway

Norway and UK

kadu01@handelsbanken.no

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