Norwegian Krone: Softer inflation but Norges Bank still hawkish – BBH

Brown Brothers Harriman’s (BBH) Elias Haddad highlights broad Norwegian Krone (NOK) underperformance after Norway’s underlying inflation dropped to an 18‑month low, below Norges Bank and consensus projections. BBH doubts one soft print will derail the Bank’s hawkish bias, expecting one more rate hike to 4.50% by year-end, which they see as a headwind for NOK given policy is already above neutral.

One more hike seen then pause

"NOK underperformed across the board. Norway underlying inflation cooled sharply in June, weighing on Norges Bank rate expectations. Underlying CPI unexpectedly dropped to an 18-month low at 2.7% y/y vs. 3.4% in May. That was below the 3.3% y/y projection by both the Norges Bank and consensus."

"Nevertheless, we doubt one month of softer inflation will be enough to curb the Norges Bank’s hawkish bias. Inflation has run above target for several years, arguing for tighter monetary policy."

"At its last June 17 meeting, the Norges Bank left the policy rate unchanged at 4.25% and flagged a hike “at one of the forthcoming monetary policy meeting.” The next policy decision is on August 13, and markets price in 42% odds of a 25bps hike and rates to peak at 4.50% by year-end."

"One more rate increase and done seems appropriate in our view, which is a headwind for NOK. The policy rate is already above the Norges Bank’s neutral rate estimate (between 2.25% and 3.75%) and Norway’s output gap is slightly below zero."

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