Norwegian Krone: Restrictive Norges Bank stance and downside risks - Commerzbank

Commerzbank’s Antje Praefcke explains that Norges Bank kept its policy rate at 4.25% and still signals that further tightening may be necessary as inflation remains above target. However, upcoming data, especially August inflation, could prompt the bank to drop its year-end hike signal. Weaker fundamentals and lower Oil prices could see EUR/NOK above 11 by year-end.

Policy caution and NOK vulnerability

"Even if Norges Bank does not want to restrict the economy more than needed, it concludes that a restrictive monetary policy stance remains necessary to bring inflation down to the target level within a reasonable time horizon. However, the statement sounds as if Norges Bank might consider not to hike again if the data during the coming weeks warrants it."

"By then, Norges Bank will have more data at its disposal and may - if necessary - drop its signal for another interest rate hike by year-end, as projected in June. In this regard, the focus now shifts to the upcoming data, particularly the August inflation figures, which will be released on September 10."

"If, at the same time, other fundamental data tends to be on the weaker side, the market could increasingly bet on the further rate hike being called off, thereby putting the NOK under some depreciation pressure. And if the oil price also falls thanks to an agreement in the Middle East, the NOK is likely to see a correction. Exchange rates above 11 in EUR/NOK are likely by the end of the year."

"Norges Bank thus acknowledges that inflation has been lower than projected, but it remains cautious. It is too early to conclude that the inflation outlook has changed materially since June. Furthermore, inflation remains well above the 2% target (the headline rate in July was 3% year-over-year, and the core rate was 2.7%), and the rapid rise in business costs in recent years will contribute to keeping inflation elevated ahead."

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