News & Analysis

The Norges Bank upheld its hawkish reputation within the DM space today by going ahead with a second 25bps rate hike to bring the deposit rate to 0.50%.

While this was widely expected by markets as a December rate hike was already name-checked three months ago, the Norwegian krone still found support in today’s decision as expectations for a rate hike moderated marginally given uncertainties around the Omicron variant. Moreover, the addition of a key passage in the statement was well received by NOK bulls and helped the krone solidify the initial gains made after the rate hike was announced.

 

There is considerable uncertainty about the evolution of the pandemic and its effects on the economy. But if economic developments evolve broadly in line with the projections, the policy rate will most likely be raised in March

– Governor Olsen

 

NOK strengthens against EUR and USD as markets brace for another rate hike in March

 

While NOK strengthened moderately upon the release, the fresh daily highs were still modest as the currency had been weakening against USD and EUR throughout the morning.

The Norges Bank stated it will keep an eye on downside effects of the latest surge in infections and that further rate hikes may be postponed if there is a need for more stringent and protracted containment measures that weigh on economic activity throughout the first quarters of next year. The committee pulled down the rate path mildly throughout the next year to reflect the likely growth impact caused by the variant, but at the same time steepened it between 2023 and 2024, suggesting that they don’t expect variant concerns to have a long lasting impact. Unlike other G10 central banks, Omicron did not throw a spanner in the Norges Bank’s work today as Norway has been quite resilient to the latest waves in terms of Covid case counts. Despite the limited number of cases, the government still tightened measures after health authorities warned of the health infrastructure becoming overwhelmed, but these measures will only impact growth at the margin.

Looking ahead, the Norges Bank will continue to monitor the health backdrop and the impact it has on near-term economic activity, but will likely focus more on rising inflationary pressures and growing wages to determine the medium-term outlook for rates.

This means labour market and inflation data could be more market-moving in the next quarters as markets gauge the probability of the Norges Bank sticking to its current rate trajectory.

 

Author: Ima Sammani, FX Market Analyst

 

 

Disclaimer
This information has been prepared by Monex Europe Limited, an execution-only service provider. The material is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is, or should be considered to be, financial, investment or other advice on which reliance should be placed. No representation or warranty is given as to the accuracy or completeness of this information. No opinion given in the material constitutes a recommendation by Monex Europe Limited or the author that any particular transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research, it is not subject to any prohibition on dealing ahead of the dissemination of investment research and as such is considered to be a marketing communication.