Norges Bank Review: Unchanged but (strongly) signalling a March hike

Norges Bank (NB) left the sight deposit rate unchanged at 0.75%, in a decision widely expected by both markets and analysts. This was a ‘small' meeting, including only a press release and the one-page ‘Executive Board's assessment', i.e. there was no monetary policy report, no revised rate path and no press conference. This, alongside the central bank having only one-month's worth of data and economic developments to digest, limited how big a change in the policy outlook the central bank could signal. The board concluded the following.

‘The Executive Board's assessment of the outlook and balance of risks implies a gradual increase in the policy rate. Global growth is a little weaker than projected and there continues to be considerable uncertainty surrounding developments ahead. In Norway, economic growth and labour market developments appear to be broadly as projected, while inflation has been slightly higher than expected. Overall, new information indicates that the outlook for the policy rate for the period ahead is little changed since the December Report.'

In other words, the central bank reiterated the well-communicated message from the monetary policy meetings in September, October and December 2018 of a 25bp March rate hike.

In the evaluation of the domestic economy, NB mentioned that capacity utilisation seems to be rising further and the outlook is solid. Updated projections for core inflation from the SAM model are slightly higher than in December.

On the external environment, NB admitted that growth among trading partners is slowing and seems to have been weaker than expected in December. In addition, global forward rates are slightly lower but still point to higher rates. As expected, NB again mentioned political uncertainty and higher volatility in financial markets.

In summary, NB clearly clarified that markets should expect a rate hike in March. Our call remains for two rate hikes in 2019 (March and September) but, notably, we see the balance of risk skewed towards three and not one rate hike. We also pencil in two rate hikes for 2020 and 2021.

Fixed income/rates. Short-end interest rates increased only slightly on the NB press release. The NOK FRA 3M MAR 19 increased around 2bp on NB reiterating its guidance of a March hike and a gradual normalisation of the target rate. In Reading the Markets Norway – Norges Bank preview: March hike set to be confirmed, 21 January, we argued for a spread widening NOK versus SEK FRA 3M SEP19 – on a relative growth and inflation outperformance of Norway versus its international peers. We opened the strategy at 140bp. Ahead of today's board meeting, the spread stood at 141.5bp. The immediate market reaction was muted. In our view, there should still be potential for a further widening of this spread – driven by strong relative Norwegian growth and subdued Swedish inflation going forward.

FX. We do not think today's signal is enough to trigger a EUR/NOK break of 9.69-9.70 today. Yet the announcement clearly shows that NB stands out as the only G10 central bank planning to hike rates in coming months. As we approach March, the repricing of the short-end (if global risk holds up as we expect) should underpin a stronger NOK on both carry level and carry momentum. We still pencil in a stronger NOK in coming months, primarily on (1) relative growth and relative rates, (2)tighter structural liquidity and (3) global risk appetite and higher oil. We remain short EUR/NOK via options and long NOK/SEK spot outright.

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