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Norway: Rate hikes to continue despite low inflation

Wed, Aug 16 2006, 15:14 GMT
by Arne Lohmann Rasmussen

Danske Bank A/S

As had been widely expected, Norges Bank hiked its policy rate by 25bp to 3.0% at today’s monetary policy meeting. The press release had been eagerly awaited, though, after June’s very low inflation rate of 0.6%.

Our impression is that Norges Bank – the Norwegian central bank – is still not particularly worried about the current level of core inflation – at 0.6% Norges Bank blamed the fall in July’s inflation on a surprise drop in clothing prices. Once again the central bank underlined that inflation can be measured in different ways, and that all measures are pointing to increasing inflation!

The bank also emphasised once again that the labour market – not the currently low inflation rate – takes centre stage, saying, *Capacity constraints and a shortage of skilled labour are posing a mounting challenge to a number of en-terprises. At the same time, corporate earnings are very high. Local government tax revenues have in-creased substantially. Household and corporate borrowing remains high. Property prices are rising mark-edly, and the level of building activity is high. Growth among our trading partners is solid, and a number of countries have raised their policy rates. These factors point to a higher interest rate. “

Today’s policy meeting indicates that the next rate hike will come in November, and that the next policy meeting, due in September, is going to be pretty boring. The open question is what kind of rhetoric and what strategy the central bank will table in its next Inflation Report. Since the labour market is becoming tighter and tighter, we still think the bank will step up its rhetoric in November even though inflation is likely to stay low for the rest of 2006. We think the statement today underlined that the central bank is less worried about the latter issue. EUR/NOK was once again trading above 800 after the release. However, we think to-day’s statement actually ought to support the NOK as we see no indication that the central bank is even close to calling off its tightening cycle. Hence, we maintain our call for EUR/NOK to move downwards over the next three months.

Published on  Wed, Aug 16 2006, 15:17 GMT