Norges Review (Mar 27): Policy Easing Delayed but Far From Abandoned?
As was perhaps just the more likely case, the Norges Bank did not deliver on the rate cut it had been flagging very clearly until recently. Instead, it kept the policy rate at 4.5% on the back of inflation having been markedly higher than expected and where wage growth in 2024 turned out higher than projected. But in a clearly far from hawkish signal, policy easing is still seen starting this year and where the outlook still sees similar easing cycle to that previously envisaged but merely some 4-6 months later. Indeed, gripped possibly by weaker real economy data and the risk of global trade tensions, the Norges Bank has revised down its GDP outlook to a degree that a much larger output gap emerges. Thus helps bring inflation (now very much overshooting) back towards target but only 2-3 years hence according to the Norges Bank. We think that the circa 4% rate projected by year end is too high against these justifiable risks and that a rate well under 4% is more likely.
Figure 1: Policy Easing Deferred
Source: Norges Bank
Clearly, inflation has moved further above target, but has been boosted by a series of one-offs and also by the CPI basket re-weighting. The question was whether the (hawkish) Norges Bank judged price pressures appear to be more persistent than it previously assumed – this does not seem to be the case. Indeed, amidst a significant reassessment, does not really seem to have altered the Boards (admittedly hawkish)’ mindset. It thinks that the output gap has narrowed, and output is now close to potential. But this is set to change as GDP growth is pared back to just over 1% in the next three years, this accentuating an ever-clearer output gap.
As for that outlook, the Norges Bank also worries about business costs, but has noted previously two-sided risks around it, encompassing the risk of an increase in international trade barriers but with less overt concern about the weak currency once again. The worry is that higher tariffs will likely dampen global growth, but the implications for price prospects in Norway are uncertain. We still see some 100 bp of rate cuts in 2025 – ie likely to be more than 50 bp greater than the Norges Bank is advertising and at least the same amount of cuts in 2026!
Figure 2: Larger Output Gap on the Cards
Source: Norges Bank