(Bloomberg) -- Norway’s central bank may be about to soften one of the world’s most hawkish monetary policy stances in a decision that could re-open the door to an interest-rate cut this year.
While Governor Ida Wolden Bache and colleagues are widely expected to keep their benchmark at 4.5% — the highest since 2008 — investors will scrutinize the outcome for clues that officials will accelerate their easing timetable after previously signaling a move only in 2025.
Pivotal to that judgment on Thursday will be their assessment of data that points to lower price and wage pressures in the economy, and how far that outweighs concerns over krone weakness.
Norges Bank has stood out with its insistence on keeping rates restrictive, in contrast to peers such as the US Federal Reserve, which is poised to cut borrowing costs later on Wednesday. It’s the strength of Norway’s currency, and the threat of imported inflation that brings, that has swayed policymakers until now.
“The krone is the only thing pulling the rate path up,” said Marthe Enger Eide, an Oslo-based macro strategist at SEB AB who sees the first cut in December. “Domestic demand is low, and is expected to remain low for the rest of 2024. Inflation is falling, and is expected to fall ahead.”
Wolden Bache said last month that the benchmark rate will probably stay high for “some time ahead,” declining to specify timing for a reduction. Some economists took that as a signal that Norges Bank is becoming more open to an earlier move.
In June, policymakers penciled in their first cut for March next year, citing mainly a stronger-than-expected economy and pay pressures.
Fading Inflation
But that backdrop is starting to fade. Underlying inflation slowed for the 10th month in a row in August, to 3.2%, partly driven by a decline in daycare fees. Wage growth is seen easing next year to 4.3% from 5.2% expected this year, according to a key survey by Norges Bank.
Meanwhile a weaker crude price provides another reason to pivot toward easing monetary policy in western Europe’s largest oil and gas exporter.
Norway’s inflation is still high however. Among the Group of 10 jurisdictions of most-traded currencies, the country is seen sharing the top spot on headline consumer-price growth this year along with Australia, according to data compiled by Bloomberg.
The krone, the worst performer in that group this year, is about 3% lower in trade-weighted terms than the level estimated by officials in June.
Norges Bank “appears to be a little more concerned about the stickiness of inflation than other central banks,” and “weakness in the labor market is much less apparent in Norway than across the rest of the continent,” James Pomeroy, an economist at HSBC Holdings Plc, said in a report. “Equally, given the government’s enviable fiscal position, should we see a sudden downturn, there is room to step in.”
The public finances are backstopped by a $1.7-trillion sovereign wealth fund — investing Norway’s oil and gas riches — which has paid for more than a fifth of budget spending since the pandemic. Government stimulus has also helped to keep registered unemployment at 2%.
Norges Bank’s survey of regional contacts released last week left analysts split on the implications for monetary policy. Companies’ lower outlook for growth was “the final straw” to accelerating easing, according to SEB’s Enger Eide.
By contrast, her counterparts at Danske Bank A/S pointed to the survey’s indication of rising capacity utilization as a danger signal for inflation.
Traders in overnight swaps now price in a full quarter-point cut by the December meeting and 44 basis points of cuts in total by the end of January. Economists also expect a move before the end of the year. In June, market bets implied a reduction of only 12 basis points in December.
“With global central banks pivoting toward easing, further evidence of improvement on the inflation front and subdued economic growth should be enough to start an easing cycle,” said Pomeroy at HSBC.
--With assistance from Joel Rinneby and Gina Turner.
©2024 Bloomberg L.P.
