Norges Bank: One more hike then gradual cuts – Nomura

Nomura’s analysts see Norges Bank delivering another rate hike in November as inflation remains sticky, before a 25 bp cut next year and further reductions beyond 2027 towards 3.50%. They note Norway’s policy rate has been unusually far above the European Central Bank's (ECB), driven by Norwegian Krone (NOK) weakness, resilient growth and higher neutral rate estimates.

Norwegian rates to normalise from highs

"Norges Bank raised its policy rate in May, partly prompted by price pressures from the Iran war, but in our view the dominant factor was persistent stickiness in underlying inflation. We expect another rate rise in November, as inflation remains sticky. We then expect a 25bp rate cut next year and believe further rate reductions beyond that are likely as we forecast inflation to slow gradually."

"After the ECB hike to 2.50% that we expect in September, and Norges Bank’s likely second hike this year, followed by a cut that we expect in 2027, there would still be a 1.75pp difference between policy rates. However, we think further cuts from Norges Bank beyond 2027 are likely, to a policy rate of around 3.50%. This would therefore lead to a policy rate differential of around 1.0pp, much closer to the typical difference in policy rates over the past decade."

"Key factors that likely contributed to Norges Bank needing policy rates to be higher for longer than the ECB since 2023 are the weaker NOK (though NOK has strengthened this year), which contributed to upward inflationary pressure in Norway, and the resilient Norwegian economy with low unemployment and high recent wage growth (with the economy boosted by the oil and gas sectors)."

"In Norway, the faster pass-through of monetary policy through the cash-flow channel may add to the reasoning (alongside the country’s lower exposure to energy shocks) why inflation in Norway peaked at a lower rate in 2022 despite Norges Bank increasing its policy rate by a smaller amount between 2022 and 2023 than the ECB. However, inflation in Norway has remained sticky since then, despite a restrictive policy rate. "

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)