Norges Bank Keeps Rates Steady – For Now

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Stockholm (Ekonamik) – The Central Bank of Norway’s Executive Board decided to keep its policy rate unchanged at 1.0% at its May interim meeting today (May 9).

Norges Bank decided to keep the rate steady following a raise by 0.25 percentage points in March upon publication of its Q1 Monetary Policy Report, which found that “capacity utilisation in the Norwegian economy was slightly above a normal level,” according to its most recent press release.

The Executive Board’s continuously bullish assessment of the outlook and balance of risks suggests, however, that the policy rate will most likely be raised again in the course of the next six months. “The Executive Board’s current assessment of the outlook and balance of risks suggests that the policy rate will most likely be raised in June,” Norges Bank’s Governor Øystein Olsen said.

Capacity utilisation “appears to be rising broadly as expected” despite the persistence of uncertainty surrounding global developments, while “inflation has been slightly higher than projected,” indicating little change since the March report.

The decision and forecast of a further rate hike in June was consistent with Swedbank analysts Kjetil Martinsen and Marlene Skjellet Granerud’s expectations, who peg the likelihood of a hike at 80%. Risks to the hike are not domestic, but international. “International risks mainly concern an escalation of the trade war. Raised tariffs and ensuing financial market turmoil could push Norges Bank to wait beyond June. Ususally, Norges Bank is very focused on domestic developments, and will not let international risks prevent them. If it goes from risk to reality, then the bank (may) want to be cautious,” they write.

Marius Gonsholt Hov, Senior Economist with Svenska Handelsbanken, read a more hawkish wording than anticipated, which could constrain Norges Bank’s scope for action but underlines the bank’s confidence. “Mainland GDP growth may be a little weaker than projected in Q1. But Norges Bank believes that this is mostly due to temporary factors. Labour market trends have been well in line with expectations, and capacity utilization is rising broadly as expected. Hence, the real economy is broadly neutral to the policy rate outlook,” he wrote.

James Smith, developed markets economist at ING, suggests the move “begs the question of whether the central bank will hike rates for a third time later this year,” suggesting the “reasonable chance” that Norges Bank will raise rates further in December as well as in June.

“A lot will depend on the outlook for global trade, which has been clouded by the recent escalation in tensions between the U.S. and China. Our trade team believe a deal is still the most likely outcome, given that President Trump will not want to enter an election year with a weaker economy and a falling stock market. But given that this may not come until the second half of the year, uncertainty is likely to weigh on global economic sentiment in the meantime,” he wrote.

Image: Norges Bank (Wikimedia Commons)

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