The Norges Bank took a cautious tone today when it announced no change in interest rates over the next couple of years. This is not a total surprise, as the Bank already flagged higher rates from the end of 2022 during its July meeting following a less severe economic shock in Norway than in most other economies.
The tone of today’s statement was slightly more explicit than in the July statement. Whereas previously they said that rates were supposed to remain unchanged for “some time ahead”, now the central bank stated the rates will remain “at the current level over the next couple of years”.
Governor Oystein Olsen said in the statement that “the sharp economic downturn and considerable uncertainty surrounding the outlook suggest keeping the policy rate on hold until there are clear signs that economic conditions are normalising”. While recent inflationary figures from Norway may suggest resilient demand, the Norwegian krone’s weakness explains a big part of the jump in the rate, as imported consumer goods prices surged by 4.6% in August, well above the total core inflation figure of 3.7%. Several policymakers from the central bank had noted the recent jump in the inflation earlier and acknowledged its temporary nature, and today’s policy statement was written along the lines of those comments.
The dovish tone triggered a further slump in the Norwegian krone, especially as some may have expected the Norges Bank to revise its rate path upward, but the long-lasting downside risks from the virus remain too prevalent to make further adjustments to the rate projections.
The Norges Bank is still signalling the possibility of a rate hike at the end of 2022, which is already more hawkish than the Swedish Riksbank’s flat projections that were announced on Tuesday.
The Norwegian krone fell to a 4-month low against the euro after the Norges Bank came out with its slightly dovish announcement. For the short term, the krone’s outlook is not a rosy picture as the recent surge in virus cases in the eurozone and the UK have contributed to increased risk-off flows into safe haven currencies. As both these regions are continuously reporting surges in cases, risk sentiment is unlikely to improve rapidly any time soon. However, house prices in Norway have seen fast annual growth over the summer as the Norges Bank’s current low rates drove mortgage rates down. With rates unlikely to change any time soon, the development in house prices is likely to continue. Norwegian GDP figures from Q2 included a contraction for the mainland of 6.3% and a contraction for the entire nation of 5.1%, significantly lower than the figures from the US (-7.4% QoQ) and the eurozone (-12.1% QoQ). With Norway’s new daily virus cases being kept relatively under control compared to the US, eurozone and the UK, the longer-term prospects for the krone are better than where it is currently trading at. We expect the Norwegian krone to trade towards the following levels over the 1m, 3m, 6m and 12m horizon.
NOK further weakens against EUR after no change in NB’s rate path
Author: Ima Sammani, FX Market Analyst