In the buildup to today’s event, it was widely known that the Norges Bank would be the first central bank in the Developed Market space to hike interest rates, with the consensus set at a 25bp rate hike at today’s meeting as this was practically disclosed by the NB previously.
What markets hadn’t accounted for, however, is the higher terminal rate in the rate path projections as well as the Bank name-checking December in the policy statement as the time for another hike.
Capacity utilisation is deemed to be higher now than back in June’s projections and with unemployment set to fall further and remain close to pre-pandemic levels, rising wages and the impact it has on inflation is set to be supportive of a sustained hiking cycle. The Norges Bank has headline inflation tracking at 3.5-4% for the remainder of 2021, while underlying inflation is projected to hover around 1% in the coming period, before rising to close to 2% towards the end of 2024. The inflation dynamics somewhat conflict, with headline inflation expected to fall below the 2% target from 2022 onwards, however, core inflation is set to rise towards target as wage pressures filter through to underlying price growth. This is the rationale the Norges Bank uses to signal a sustained period of rate hikes, which sit on a more aggressive trajectory relative to June’s forecast.
* Percentage change from June MPR in parentheses
While the central bank did acknowledge the ongoing risks and uncertainties attached to the pandemic, it stated the high vaccination rate has reduced the need for Covid-related restrictions and heightened economic activity is likely to continue through Autumn. This errs on the more hawkish side compared to comments by other European policy makers who foresee a rise in cases, hospitalisations and deaths as the temperature drops over the next months, which is expected to weigh on activity at the margin.
The krone advanced to its strongest level since the Norges Bank’s June meeting, although the bulk of the EURNOK move occurred prior to the meeting as markets were pricing in a hawkish decision to start with.
The 25bps hike itself didn’t cause the extension in the NOK rally, largely due to markets fully pricing this in advance, but the upwards revision to the policy path from June 2022 onwards acted as a tailwind for the krone rally.
EURNOK drops to June’s lows, but daily moves are more limited
Author: Ima Sammani, FX Market Analyst