Norges Bank Review: Even More Caution?
Surprising few, the Norges Bank Board left the policy rate at 4.5% for a third successive meeting at its latest Board meeting. It also retained the thinking first aired at the December meeting, namely ‘policy to stay on hold for some time ahead’ rhetoric, this more formally evident in what were modest revisions to the policy path outlined in the March meeting which suggested no easing than Q3, if then. However, a slightly more hawkish tone was added this time around when it was suggested that data so far could suggest that a tight monetary policy stance may be needed for somewhat longer than previously envisaged. This very much rues out any easing before September, even with this policy decision and thinking coming with no updated forecast. Notably, the Board seem more preoccupied by slightly better real economy data that the further inflation undershoot that has emerged of late, this all the more ironic given that Norway has perhaps some of clearest and broadest disinflation evidence to hand (Figure 1). We now defer the first Norges Bank rate cut until September, but note that Board thinking could be very much revised should CPI data continue to surprise it to the downside – as data next Friday very much may do!
Figure 1: Disinflation Clear and Broad
Source: Stats Norway, CE, smoothed is 3mth mov avg
Against a backdrop of continued currency weakness, the Norges Bank Board has almost disregarded the recent inflation undershoot, instead preferring to focus on what it says is a perkier real economy, possibly in the hope that this may bolster sentiment in the FX market. As for inflation, we think the Board has underestimated the extent to which it has retreated of late, this very much evident in seasonally adjusted data for various core measures as well as the familiar CPI-ATE figure (Figure 1).
Otherwise, and outside of what has been a further recovery in house prices, we feel real economy data is at best mixed, not least with credit growth still negative in real terms and where actual activity may have been boosted in the early part of the year by unseasonable weather. Admittedly, the key Regional Survey produced by the Bank did suggest that economic prospects had been revised up somewhat since the previous survey. But this encompassed still wide differences across sectors, most notably with oil services and services expecting a rise in activity, while contacts in the other sectors envisaged a fall in activity. In addition consumer confidence, especially a willingness to make major purchases is still near record-lows.
At this juncture, however, we can no longer adhere to our view that the Norges Bank may actually start to ease in June but stress that amid a still weak krone, our rate cut expectations need deferring , with 2-3 cuts this year now on the cards as opposed to the four we previously envisaged. The first is likely to come at the Sep 19 meeting instead. Notably, the Norges Bank was the first DM central bank to start hiking; it clearly does not want to be the first to start easing.