Norges Bank Preview (Jun 19): Policy Easing Schedule Clearer?
It is very unlikely that the Norges Bank will do anything at this month’s Board meeting other than to suggest the easing cycle will start later in the year and that the policy rate will thus remain at 4.5% - for the time being. In fact, it will have to be more explicit about any such a timetable given that an updated Monetary Policy Report will update an array of forecast, including that for the policy rate. In fact, we think that armed with much softer CPI outcomes of late (Figure 1), it will (still) point to a cut as soon as at the next meeting (Aug 14) and retain an outlook that brings rates down to around 3.25% by end-2026. We still see faster easing, both this year and next!
Figure 1: Core Inflation Pressures Back Towards Zero?
Source: Stats Norway, CE – smoothed is 3 mth mov avg
The hawkish line of thinking from the Norges Bank only helps bring inflation in its view back towards target but only 2-3 years hence. We think that the circa 4% rate projected in March for year end is too high against and that a rate somewhat under 4% is more likely, not least as we see a larger and earlier output gap. Indeed, we think the latter is partly responsible for the marked fall in inflation seen of late – admittedly unwinding the overshoot of the early part of 2025. Notably, May data shows that core inflation (CPI-ATE) fell 0.2 ppt to 2.8%, well below (again) Norges Bank thinking (it expected 3.1%). Looking at the details some of this softening may be calendar related but over the past couple of months, CPI inflation has been two to three tenths lower than Norges Bank’s expectations. And as Figure 1 shows CPIF and core inflation (ie CPIF ex food) are running nearer zero on an adjusted and smoothed m/m basis.
Overall, we still see some 75-100 bp of rate cuts in 2025 – ie likely to be more than 50 bp greater than the Norges Bank has been advertising and at least the same amount of cuts in 2026! The question also being how the Norges Bank changes its tone. In this regard, it was hardly a surprise that the Norges Bank again kept policy on hold in May as was the fact that it failed to be any more explicit about when the rate cut cycle may begin. Instead, while still suggesting rate cuts later this year, it cautioned about premature easing. This is somewhat hindsight forecasting given that until the stable policy decision six weeks previously it had been flagging very clearly a rate cut by March. As a result, it kept the policy rate at 4.5% on the back of inflation in recent months having been markedly higher than expected. But it did note that recent global trade tensions complicate the policy outlook, both by adding to downside risks for growth but also adding to downward pressure on the krone.
The Board did acknowledge that with trade barriers having become more extensive, there is uncertainty about future trade policies. But somewhat puzzlingly, it suggests this could pull Norway’s interest rate outlook in different directions. On the one hand, the global growth outlook appears to be weaker, and oil prices have fallen. Norway’s main trading partners are now expected to make more rate cuts than previously. On the other hand, the krone has weakened somewhat and been weaker than assumed.
Once again, the (weak) krone is at the center of Norges Bank thinking. This currency preoccupation of the Board seems very puzzling to us 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 encompassing much reduced imported price pressures, at least prior to November numbers. Regardless, currency weakness has not prevented imported consumer goods inflation from falling and the latter (at under 1% y/y) is hardly responsible for the current CPI overshoot (Figure 1). As a result, it is worth underscoring that, since the last hike 15 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. But perhaps bad habits are hard to break.