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Fast Comment NorwayPreview: Fiscal budget for 2020 and core inflation for September

  1. Core inflation (CPI-ATE) hovering around target
  2. The budget proposal should be a non-event for financial markets
  3. Norges Bank to keep its policy rate unchanged for the foreseeable future
Core inflation (CPI-ATE) hovering around target
Next week brings the government’s budget proposal for 2020 and figures for core inflation in September, due on Monday and Thursday respectively. Starting with the latter, core inflation, as measured by the CPI-ATE, has fallen sharply from its peak. At 2.1 percent in August, it was further from the peak of 2.6-2.7 percent of March and April this year. As we and Norges Bank see it, there are reasons to believe CPI-ATE will hover just a touch above the inflation target in the coming months. In its September Monetary Policy Report, Norges Bank forecast CPI-ATE remaining unchanged in September, at 2.1 percent, which is also our forecast. More fundamentally, the key insight is that core inflation is expected to hover around the target in the near term, thus the key policy rate path is more dependent on the growth outlook and how that is affected by the global slowdown, in our view. The global backdrop has deteriorated further since Norges Bank’s decision in September, which further dampens the scope for more rate rises by Norges Bank. We continue to believe the base case is for Norges Bank to keep its policy rate on hold for the foreseeable future.
The budget proposal should be a non-event for financial markets
Turning to the budget proposal, the market value of the Government Pension Fund Global has increased markedly since the beginning of the year. In theory, there is therefore significant room for revenue spending, without breaching the fiscal rule. However, we do expect the government to let revenue spending stay below the three percent rule in 2020. The key figure in this regard is the fiscal impulse, which shows the budget’s effect on the economy. The fiscal impulse is calculated as the change in the structural non-oil deficit as a proportion of trend GDP. Figures above zero point to revenue spending rising faster than that implied by the natural growth rate of the economy (i.e. an expansionary impulse). While the rise in the market value of the fund (technically) allows for a significant fiscal impulse in 2020, we believe the government will choose to keep the budget closer to neutral, given that the Norwegian economy is hovering a tad above normal capacity utilisation. This is also Norges Bank’s thinking. In its September Monetary Policy Report, Norges Bank anticipated a fiscal impulse of just +0.1 percent in 2020.


Marius Gonsholt Hov

Senior Economist


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