TD Securities analysis team notes that the Norges Bank raised its policy rate by 25bps today to 1.50% for the fourth rate hike in the last year.

Key Quotes

“Time will tell whether or not this was a policy mistake, and something that may eventually have to be reversed, given downside risks to global growth. But it's almost certain that this will be the last rate hike we see in western Europe for a very, very long time.”

“Looking ahead, the Norges Bank has forecast a fairly flat policy rate profile. It peaks at 1.60% from 2020Q4 to 2021Q2, and then interestingly, actually glides lower to 1.53% by the end of the forecast period in 2022Q4. The primary factor preventing the Norges Bank from forecasting easing going forward is the exchange rate, which adds up to nearly 0.4ppts to the policy rate profile through 2020-21. The weaker krone allowed the Norges Bank to go ahead with its rate hike today, and given that the Norges Bank expects global trade tensions to persist and continue to weigh on the risk-sensitive krone going forward, the currency is also expected to provide enough additional stimulus in the future so that the Norges Bank doesn't need to follow most of the rest of the G10 in cutting rates again.”

“Looking at the Norges Bank's macro forecasts, GDP growth was actually revised a touch higher over the next year, bucking the trend that we've seen across most of the rest of Europe. Near-term inflation on the other hand was revised a bit lower, but the Norges Bank sees CPI-ATE picking up again by the end of 2020 and remaining slightly above the 2.0% target, supported by the weaker krone profile.”

“With the Norges Bank having unexpectedly delivered a rate hike to 1.50% today, we're removing the rate hike from our forecast for H2 2020 and we now expect the Norges Bank to remain on hold until at least into 2021.”

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