Preparing for Norway’s Next Interest Rate Increase: Decision Guide

09 May 2019, 10:27 AM IST

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Norway’s central bank could this week give more clues on when the next interest-rate increase will come as Scandinavia’s richest economy benefits from a jump in oil prices.

Policy makers in Oslo are on Thursday anticipated to leave their benchmark rate at 1.00 percent, according to all 18 economists surveyed by Bloomberg.

The big question is whether they will fine-tune their language on when the next rate increase will come, after in March saying a hike will come within the next six months. The meeting is between monetary policy reports, meaning that the bank typically doesn’t reveal any new guidance or forecasts.

Backed by a recovery in oil prices and massive amounts of stimulus pumped into the economy each year, Governor Oystein Olsen’s situation is worlds apart from that of the European Central Bank and Sweden’s Riksbank, who are both keeping rates below zero. Olsen has raised rates twice since December and flagged more tightening in March.

With an oil industry that’s running at full speed again, Norway’s economy is starting to bump up against capacity limits. Unemployment has stabilized below 3 percent and inflation is running above target. Meanwhile, the price of oil soared almost 30 percent since the start of the year.

The governor and his colleagues did get some bad news on Wednesday, however. A report showed industrial product declined 0.4 percent in the first quarter.

The Norwegian krone is forecast to end the year as the top performer in the Group-of-10 this year, according to a Bloomberg currency survey. Still, analysts see little impact on the currency from this week’s decision, leaving its near-term fate in the hands of trade negotiation developments and the next inflation data, according to Danske Bank currency strategist Kristoffer Kjaer Lomholt.

The krone has struggled in the past few weeks hurt by a fall back in oil prices and trade tensions, giving Olsen more scope to raise rates. It’s down more than 2 percent from a high against the euro on April 22. Pessimism was clear in the options market, where six-month euro-krone risk reversals have surged to the highest level since last March.

But as central banks around the world are hitting the pause button and signaling a more dovish stance, policy makers in Norway could be forced to slow their march toward higher rates. Weighing strong domestic data against a slowdown abroad is splitting economists in their view on the next rate increase by Norges Bank.

Here’s a summary of what economists say about the May rate decision:

Swedbank economist Kjetil Martinsen

“The May meeting is the most ‘live’ interim meeting in a long time. But at the same time, it is pretty obvious to us: Norges Bank will explicitly point to June for timing of the next rate hike to 1.25%. Both the krone and shorter-dated FRAs should find some support in that message.”

DNB Markets senior economist Kyrre Aamdal

“The economic trends since the March meeting have been mixed, with international factors reducing the probability of a June hike. Domestic economic trends are largely in line with forecasts and should be neutral to the rate assessment. Higher oil price, the NOK trend and higher-than-expected inflation in March support a rate hike in June. But we also find it likely the Bank will be cautious and may guide for a rate hike after the June meeting”

Handelsbanken Markets chief economist Kari Due-Andresen

“The strategy from March implies an unchanged policy rate at the May meeting, and we expect Norges Bank will stick to this strategy. An unchanged outlook implicitly confirms a high probability for an interest rate hike in June. What Norges Bank will do in June will depend on the further data development. Our expectation is that Norges Bank will wait until September to hike the policy rate.”

Nordea Markets senior economist Erik Bruce

“The combination of higher oil prices and weaker NOK argues for about 15-20 bp higher rates at the most if Norges Bank should have made a path today (also taking into account expected lower rates abroad). The combination would have been more than enough to lift the average Q3 key rate level from 1.20% to above 1.25% which means a “100%” probability of a June hike.”

Grupo BBVA Head of G-10 currency strategy Roberto Cobo Garcia

“The Norges Bank will keep rates on hold at 1.00% and reiterate that further rate hikes remain on the cards. Thus we expect NOK to receive some support from the decision. But in the end, Norway’s CPI figures could be more influential for the NOK, as any positive surprise that enhances the bank’s hawkish tilt would support NOK gains.”

SEB AB chief quantitative currency strategist Karl Steiner

“We do not believe that they will reveal any new policy hints. Furthermore we do not think that the market expects a confirmation for a June hike at this meeting so if we are right there should not be any significant downward reaction in rates and the NOK.”

To contact the reporters on this story: Sveinung Sleire in Oslo at ssleire1@bloomberg.net;Anooja Debnath in London at adebnath@bloomberg.net

To contact the editor responsible for this story: Jonas Bergman at jbergman@bloomberg.net