Norges Bank Preview (Sep 19): Less Hawkish Rhetoric?
As has been the case for the five previous policy meetings, the Norges Bank is almost certain to keep its policy rate at 4.5% when the Board offers its next verdict on Sep 19. But amid a slightly disappointing mainland real economy backdrop and what have been softer than (Norges Bank) expectations for CPI data of late, the question is whether the Board will tone down its hawkish leanings and perhaps depart from its recent stress of ‘policy to stay on hold for some time ahead’. It can do this informally or, with an updated set of projections is a fresh Monetary Policy Report (MPR), it could back away from an outlook that last time (in June) foresaw no rate cut until early-2025, some three months later than considered previously (Figure 1). Certainly at the last (August) meeting, there was no such change in its thinking, instead very much putting the (weak) krone at the centre of its thinking. This to us seems very puzzling as a) this hawkish policy leaning has failed to bolster the currency and b) the weak currency has not prevented a marked fall in inflation that in adjusted m/m terms is not only well below target but where imported price pressures have nevertheless abated (Figure 2). We still think continued inflation weakness in coming months as weaker profit margins offset labor costs issues will deliver at least one cut by end-year and over 100 bp in 2025!
Figure 1: No Rate Cut Seen by Norges Bank Until 2025?
Source: Norges Bank
The Norges Bank last month noted uncertainty about future economic developments, but this was more a result based around the balance of risks stemming from developments in the krone exchange rate and the potential implications for inflation. But possibly advertising that a change of thinking may be under consideration, the Board highlighted then that it will have received more information about economic developments ahead of this next looming monetary policy meeting especially as new forecasts will be presented.
We think any such change in thinking is long overdue. In this regard, since the last hike ten months ago, a hawkish tone of keeping rates high for some time has repeatedly failed to unwind krone weakness, this despite the added bonus of a substantial Norwegian current account surplus.
What is clear is that the Norges Bank has an inflation remit, not a currency one. Yes, the currency is an ingredient into the inflation picture, albeit one that affects more the price level than the rate of price changes – other factors determine the latter more. Regardless, the (weak) krone has not prevented imported inflation falling – now at 1.9%, less than a quarter of the rate some 12 month ago (Figure 2). In addition, the economy has all but stalled, with GDP growth this year likely to come in no higher than 0.6%, two-thirds current Norges Bank thinking. This weakness can be summed up as ‘Growth in the mainland economy has been unusually weak over the past year, and this trend continued in Q2 2024’ this view emanating from Statistics Norway
Figure 2: Weak Currency Has Not Stopped Imported Inflation From Tumbling
Source: Stats Norway
Notably this has helped drive inflation down on a broad basis so that the targeted measure CPI-ATE (ie the CPI adjusted for tax changes and excluding energy products) has more than halved in the last year to 3.2% in August. Admittedly, some of this is a result of one-off factors related to childcare costs. Moreover, this rate is still above the 2% target and where Norges Bank projections see it remaining (well) above even out to 2027, albeit where that August outcome is well below existing official projections. But even this is of secondary importance to just how much recent price dynamics have weakened, something that largely backward looking y/y rates are masking.
Indeed, as for inflation, we think the Board has underestimated the extent to which it has retreated of late on an underlying basis, this very much evident in seasonally adjusted data, for various core measures; we have computed a core measure in which food is excluded from the familiar CPI-ATE figure. Both this core and the CPI-ATE measures show recent seasonally adjusted m/m dynamics now to be running at pace nearer 0.1% per month, ie consistent with the 2% target being undershot and actually back (if not below) the average rate in the ‘lowflation’ decade before the pandemic. And this is in spite of the impact of rental inflation (around 17% of the CPI) running still at over 4% y/y, implying headline inflation ex-rents now at 2.5%. This begs the question whether Norges Bank policy is actually buttressing inflation as higher interest rates therefore mean higher inflation as rents are largely being driven by (high) mortgage rates. Moreover, the resilience in rents may help explain the puzzling manner in which consumer confidence has developed of late, ie where households perceive a better financial position but are not willing to consider spending more.
Against this backdrop we think the Norges Bank will advertise a change in thinking in its Sep 19 policy verdict, aided by updated projection and influenced by the policy reassessments that fellow DM central banks seem to be making. After all, with policy at 4.5%, the Board has ample room to ease and still have a monetary stance that would remain restrictive. All of which reflects a marked irony: among DM central banks the one with the lowest underlying inflation backdrop is the one most resolutely refraining from actual or advertised rate cuts.