Norges Bank Review (Mar 26): Unsurprisingly Too Hawkish
While no change in policy was expected from the Norges Bank’s verdict this month, the clear shift in rhetoric was almost inevitable. It dropped its recently repeated assertion that ‘the policy rate will be reduced further in the course of the coming year’ and instead suggested that ‘the policy rate will likely be raised at one of the forthcoming meetings’. Its forecast implied that this would entail one or two 25 bp hikes but that these will be short-lived with the policy rate coming down afresh from early next year. Amid suggestion that a hike was considered at this juncture, we would not exclude the Norges Bank from exercising this bias even amid what it terms the uncertainty surrounding oil and gas prices is unusually elevated. But we feel the Board is being excessively hawkish and not just on account of the stronger currency seen of late.
Figure 1: Revised Norges Bank Policy Outlook
Source: Norges Bank MPR (%)
Indeed, this clear warning of hiking is premature to say the least – NB the softening in house prices now emerging is very probably a reaction by households to the reining in of rate cut expectations in recent months, ie prior to the outbreak of the war in Iran, let alone this hiking warning. Moreover, the updated forecasts show an even greater output gap emerging and surely this will have more impact in reining in any inflation surge than one or even two 25 bp hikes. Moreover, we question the extent to which the inflation upgrades are realistic with CPI-ATE now seen averaging 3.3% this year and 2.8% next, some 0.6 ppt and 0.4 ppt higher than envisaged three months ago. Some of the upgrade to this year is due to the apparent fact that CPI data have been higher than expected, but is this an indictment of the Board’s forecasting as despite its assertions to the contrary underlying inflation has been reasonably well behaved.
Indeed, underlying inflation short-term dynamics are far from unfriendly (Figure 2) and with seemingly downside economy risks materialising, we still think that the Norges Bank has already been far too cautious as its updated plans point to keeping policy very restrictive through the projected timeframe out to 2029, ie the policy rate stays well above 3%. For some time, we have argued that Norges Bank’s fixation with apparently resilient inflation was overdone, resulting in overly cautious policy-making, the latter also fixated by the exchange rate.
Figure 2: Underlying CPI Inflation Actually Well Behaved
Source: Stats Norway and CE – Core is ex food and energy, % chg y/y
Given Norges Bank caution, we remain far less confident about the extent of easing into 2026 and have scaled back our projections at least for the current year. Any hike of the ilk that the Board (and markets) have factored in the course of next few months is likely to be short-lived both as disinflation resumes and the real economy toll becomes more evident – this on the basis of our baseline scenario of a 4-8 week Iran War. More likely, we envisage two further 25 bp cuts in H2 and then 100 bp of cuts through next year. At 2.5%, that would still leave the policy rate still within the neutral rate range estimated by the Norges Bank. In other words, the Norges Bank will be merely taking its foot of the brake, rather than pressing on the accelerator.
I,Andrew Wroblewski, the Senior Economist Western Europe declare that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further declare that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.