Norges Bank Preview: Rates unchanged - easing bias reiterated

Main points

We expect NorgesBank to leave rates unchanged on Thursday. There have been few important data releases since the September meeting and most economic figures are close to Norges Bank’s September projections with a few important exceptions: 1) The 2016 fiscal budget was more expansionary than expected, 2) global rates are lower as central banks of close trading partners have eased or are expected to ease, 3) private consumption is looking weaker, 4) manufacturing downturn is decelerating and 5) the NOK is weaker than projected.

We expect Norges Bank to reiterate its September easing bias but that the statement is otherwise balanced with no clear signals that the bank is planning to cut in December.

Thursday’s meeting includes a rate announcement, a statement release and a Q/A session. Importantly, no new Monetary Policy Report will be released. The current rate path from Norges Bank has a 64% implied probability of another 25bp rate cut on a 12M horizon and a less than13% probability of Q4 15 rate cut.

Main risk factor. In our view the largest risk factor is Governor Olsen taking a more hawkish approach to the more expansionary 2016 fiscal budget.

Market pricing. We estimate that markets are pricing in 0bp worth of easing for the November meeting and 29bp cumulative worth of cuts for the coming 12M (the point where most easing is priced). For the December meeting we estimate 6bp worth of cut is priced.

FX. We expect EUR/NOK to remain little changed on the announcement. We do not expect a NOK appreciation trend to materialise until the Norwegian business cycle turns and Norges Bank can signal that there is no longer a need to cut rates further. In our view, this will first be a story for 2016. We target EUR/NOK at 9.30 in 1M, 9.30 in 3M, 9.25 in 6M and 8.80 in 12M.

Fixed Income. If we see a further re-pricing of the Norwegian curve after the Norges Bank meeting we would see that as an opportunity to go long NGBs asset swapped or against Germany. We prefer the 8-10Y segment of the NGB curve.

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