NOK: Happy days? - Rabobank

This morning, the Norges’s Bank maintained its hawkish position as Governor Olsen clarified that rates will most probably be raised after the summer, notes Jane Foley, Senior FX Strategist at Rabobank. 

Key Quotes

“This followed a speech last month in which the Olsen had again warned that “this year, the policy rate may be increased for the first time in seven years”.  Today’s Executive Board assessment painted a positive picture on growth, stating that “growth in the Norwegian economy picked up in 2017, and the negative output gap narrowed. Low interest rates, improved competitiveness and an expansionary fiscal policy have contributed to the upturn”.  On Inflation, the statement suggests that “after falling markedly in the period to autumn 2017, inflation has edged higher”.  While core inflation is still lower than projected, the Norges Bank acknowledges that “wage growth picked up in 2017”.”

“Given the still subdued nature of core inflation, it would still be possible to argue that the Norges Bank still has plenty of reason to be cautious on policy. However, in last month’s speech Olsen gave an interesting insight into the thinking of the central bank.  He commented that ““we would be less worried about low inflation than if real economic prospects were also weak”.  This suggests that the Norges Bank may be keen to start normalising interest rates and wants to take advantage of a period of strong growth to do this.  The reason why the Norges Bank would like to normalise policy, is almost certainly linked with the housing market and current high levels of household debt.”

“Olsen last month complained that Norway was one of several small economies that “imported low interest rates and experienced rapidly rising house prices and debt” as a consequent of the global financial crisis. In this period “low interest rates in large economies that were severely hit by the financial crisis quickly led to lower rates in countries where the cyclical situation, in isolation, would have implied higher rates. This was the case in Norway until oil prices fell.”  Olsen’s tone infers that now that “advanced economies have emerged from another challenging period”, the Norges Bank is likely to be react by slowly reducing policy accommodation.  The fact that oil prices are off their lows and that Norway could afford generous fiscal support during its downturn will also be contributing to the Norges Bank’s outlook.”

“Going forward, Olsen will have to continue paying attention to the policies of major central banks. A dovish ECB could still impact the timing of policy decision given the economy’s sensitivity to exchange rate movements.  That said, the Norges Bank’s measures of the import weighted krone is currently holding very soft levels suggesting that the Norges Bank is unlikely to be worried about some currency appreciation. EUR/NOK has broken down through key support hitting our 9.50 target.  Technically, the move is suggestive of further downside potential for EUR/NOK.  We are now looking for a move to the 9.40 support area on a 1 to 3 mth view and have revised lower our year-end target to last year’s low at 9.22.”