News & analysis

The Norwegian krone ripped higher by just under a percentage point against the euro this morning, reaching a 1-week high after the Norges Bank raised its implied rate path for 2023 along with its forecasts for economic growth and core inflation for this year.

As expected, the central bank left its benchmark deposit rate at zero per cent after delivering three rate cuts since the start of the pandemic, to cushion the sharp economic downturn the nation was facing.

Mainland GDP is projected to contract by 3.5% in 2020, compared to their previous forecast in May which foresaw a decline of 5% in 2020. The projected interest rate forecast also sees an increase in the policy rate from current levels towards the back end of the projection period, 2023.

The Norges Bank stated in its press release that “the Committee’s current assessment of the outlook and balance of risks suggests that the policy rate will most likely remain at today’s level for some time ahead”, despite the upwardly revised forecasts. With unemployment levels falling from 9.6% in April to 6.4% in May and oil prices almost doubling in the past six weeks, activity seems to have picked up faster than expected by the Norges Bank.

The Norges Bank previously predicted a rate of 0% by the end of 2023 but now suggests its first 25bp rate hike at the end of Q1 2023 with the second in Q3 2023, bringing the implied rate to 0.65% by the end of 2023. The rise in the NB’s implied rate path is likely to have been the key driver in the krone’s price action this morning as the decision to leave rates unchanged was already fully priced in by markets and did not come as a surprise.

The path to recovery remains uncertain and despite the recent uptick, activity remains substantially lower than pre-virus levels.

The central bank signalled to keep interest rates at today’s level for the next couple of years unless output and employment increase father than projected, or if there are signs of accumulating financial imbalances. Keeping interest rates at a record low of zero per cent can certainly contribute to speeding up the return to levels seen at the beginning of the year, but the central bank is unlikely to waver from its current stance for some time as they await the economic climate to settle.


Norges Bank raises its policy path (blue) to suggest 65bps of hikes by 2023 from their May projection of 0% (purple)


Norwegian krone rises to 1-week high against euro after NB announcement



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