(Bloomberg) -- Norway’s central bank is set to keep borrowing costs on hold on Thursday and reiterate plans for a more aggressive policy than most other rich-world peers as the krone’s recent weakening risks hampering its fight with inflation.
Norges Bank will stick with the benchmark interest rate at 4.5%, the highest level since December 2008, according to all 16 economists surveyed by Bloomberg. As the so-called interim meeting won’t include a new rate path or economic forecasts, investors will likely zero in on the forward-looking comments to see whether policymakers deviate from their June outlook for no monetary easing until next year.
Officials meet against the backdrop of favorable inflation data that is counteracted by a renewed krone weakness, threatening to boost imported price growth. That means the contrast will likely remain sharp between Norges Bank — which was the first with post-pandemic tightening among the holders of major currencies — and its neighbors Sweden and the euro area, where easing has already started.
“I guess Norges Bank will acknowledge that inflation has come down more than anticipated and note that it’s the imported price growth that has surprised to the downside while domestic inflation remains quite high,” DNB Bank ASA’s senior economist Oddmund Berg said. “The krone has been weaker than forecast, which is why we believe Norges Bank will reiterate their message from June,” he added.
Governor Ida Wolden Bache said in June the key rate will probably remain unchanged until the end of the year as the economy “has not cooled down as much as we had expected.” She also said then that borrowing costs may have to be raised if wage and price growth “stay elevated for longer” due to higher capacity utilization or a weaker krone.
While off its recent lows, the Norwegian currency has been hit since July as weaker inflation data boosted expectations of a rate cut in December and as global market turmoil made investors shun smaller currencies.
The krone is about 3% lower in trade-weighted terms than the level estimated by Norges Bank in June. Wages were growing at 5.4% on average in the second quarter, more than the 5.2% projected by the central bank for the full year, according to data published last week.
Even as consumer-price growth has consistently undershot Norges Bank’s forecasts, Norway is still expected to share the fastest pace this year in the G-10 space with Australia, at 3.4%, according to economists’ forecasts compiled by Bloomberg. The central bank predicts inflation to still exceed its 2% target at the end of the current forecast horizon in 2027, latest projections show.
Traders in overnight swaps now price in 22 basis points worth of cuts at the December meeting, compared with 12 basis points of cuts seen at the end of June.
“We expect the August meeting to be another hawkish hold, pushing back on market pricing,” Bank of America economists Alessandro Infelise Zhou and Michalis Rousakis said in a note to clients, adding they expect the first reduction in December. “The guidance in the policy rate decision is likely to highlight the krone-driven upside risks to medium-term inflation prospects and reiterate that the Committee stands ready to raise the policy rate again if necessary.”
--With assistance from Joel Rinneby.
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