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Fast Comment NorwayNorges Bank preview: No change in August

  1. Policy rate likely to be kept unchanged; Will there be signals? Most likely not
  2. Outlook deteriorating, trends on the weak side of Norges Bank's expectation
  3. We believe Norges Bank will hike no further
Policy rate likely to be kept unchanged; Will there be signals? Most likely not
Norges Bank is widely expected to keep its policy rate on hold at its upcoming meeting, at 1.25 percent. The big question is whether it will offer a signal that it intends to raise its policy rate in September, or whether it prefers to adopt a wait-and-see approach. We believe the latter is more likely to happen. In the key policy rate trajectory, there is a likelihood of around 70 percent of another rate hike in September, and the hike is fully incorporated by the end of the year.
Outlook deteriorating, trends on the weak side of Norges Bank's expectation
The global backdrop has turned markedly sour since the policy rate meeting in June. Evidence so far points to a further slowing in global growth, as the service sector has started to suffer the consequences of the weakness in the manufacturing sector. More importantly, the trade war between the US and China has escalated, and the risk of a hard Brexit has increased substantially. The Fed has already cut its policy rate once, and market expectations are for two more rate cuts this year, with the next cut coming as early as in September. Additionally, the ECB is expected to deliver a rate cut in September and to re-launch a quantitative easing programme soon. On aggregate, key interest rate expectations among Norway’s trading partners have fallen further by about 20bp. In isolation, this should have a dampening effect on Norges Bank’s key policy rate path. Heightened global risks have also weighed on oil prices. On the other hand, the Norwegian krone has weakened significantly owing to increased risk aversion. As such, the currency has continued to act as an important buffer against a weakening global backdrop. Turning to domestic conditions, trends in the real economy have been in line with or slightly weaker than the central bank’s expectations, in our view. Following what was a temporary slowing in Q1, evidence so far points to a sharp rebound in mainland GDP growth in Q2, much as Norges Bank anticipated in its June Monetary Policy Report. However, labour market trends have been on the weak side of expectations, although the deviations are small. Nevertheless, the outlook continues to point to a significant slowdown in mainland GDP growth from next year. The impulse from rising petroleum investments – the key growth contributor this year – will fade. In addition, weakening global demand will continue to dampen the outlook for the non-oil export sector. Housing prices in Norway have continued to grow at a modest pace and household credit growth has eased further, edging even closer to the growth rate for aggregate disposable income. Supply and demand indicators continue to suggest a well-balanced housing market in the near term, and household debt growth is set to ease a bit further. Finally, core inflation has come in on the weak side of the central bank’s expectation in June and July. Even though the deviation is not large (0.2 percentage points in both months), the data adds to other information pointing to a slightly weaker picture than the central bank had expected.
We believe Norges Bank will hike no further
In summary, domestic conditions have been on the weak side of the central bank’s short-term estimates, while the global backdrop has deteriorated markedly. This deterioration increases the probability of a more marked slowdown in mainland GDP growth from next year, however, when the impulse from the Continental Shelf also fades. The big question is whether the accompanying weakening of the krone can provide a buffer that is large enough for Norges Bank to stick to its rate-hiking plans. We believe Norges Bank will have to call of its planned 1-2 more interest rate hikes given the gloomy outlook for the global economy. However, given Norges Bank’s previous hawkish stance, we cannot be entirely certain. Next week, however, the policy rate will likely be kept unchanged, and we believe it is most likely that Norges Bank will keep its thoughts about September to itself.


Source: Macrobond

Disclaimer

Kari Due-Andresen

Chief Economist Norway

Norway and UK

kadu01@handelsbanken.no

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