Norway Is Set to Stick With Its Higher-for-Longer Rate Mission
(Bloomberg) — Norges Bank may be about to cement expectations that one of the first rich-world central banks to raise borrowing costs could turn out to be among the last to cut them.
With all economists surveyed by Bloomberg anticipating officials to keep the key interest rate at a 16-year high of 4.5%, investors will focus on how firmly Governor Ida Wolden Bache and colleagues insist that Norway needs to restrict monetary policy for “some time ahead.”
Reiterating that message would affirm the claim of one of the pioneers of post-pandemic global tightening, whose hiking cycle began in 2021, to be one of the staunchest disciples of the higher-for-longer mantra that the US Federal Reserve first aired last August.
While inflation recently slowed more than forecast, officials are confronting a currency that’s vulnerable to weakening, an economy showing signs of resilience, and wage demands that could threaten to further stoke consumer prices.
“Norges Bank is likely to be cautious in fueling any near-term rate-cut expectations,” said Amanda Sundstrom, a fixed income and currency strategist at SEB AB in Stockholm. “For those hoping for signals of rate cuts anytime soon, the message might have a hawkish sound to it, but we still see Norges Bank as likely to lower their rate path further out and signal at least one cut in 2024.”
Bolstered partly by surging investment in fossil fuel sectors, registered unemployment has remained at 1.9% for a seventh month, while economic output rose both in the fourth quarter and in January — outcomes that all defied Norges Bank’s downbeat forecasts.
Read More: Norway January Economic Growth Surprise Cools Rate-Cut Bets
The tight labor market is providing fertile ground for wage demands. With a new round of collective bargaining kicking off this week, businesses are bracing for bigger raises than previously expected, according to a survey by the central bank. Unions want increases in inflation-adjusted wages that have declined for the past two years.
Given that backdrop, most economists surveyed by Bloomberg expect no easing before the third quarter, with another quarter-point cut seen in the fourth quarter.
SEB’s Sundstrom reckons officials will likely signal a “high probability of a rate cut in September and a slight probability of another one in December.”
In contrast, analysts at Svenska Handelsbanken AB now expect Norway’s central bank to begin monetary easing in December, having revised their previous forecast of August on Wednesday.
Investors are also speculating that Norges Bank will hold firm. While markets are betting on rate cuts by the Fed or European Central Bank in June, traders in overnight swaps have priced in only a 45% chance of a Norwegian reduction by August, versus 84% seen a week ago.
The decision coincides with judgments on borrowing costs for almost half the global economy. The Fed is widely expected to hold rates steady for a fifth consecutive meeting, and to continue to project three quarter-point rate reductions in 2024.
For Norwegian officials, the US decision on the eve of their own one may be significant. While the krone lingers about 2% above the level they forecast, it remains a channel for imported inflation, not least as the third-worst performer in the Group of 10 most-traded currencies so far this year.
Nordea Bank Abp’s strategist Dane Cekov said in a report that a Fed signal of fewer cuts could affect the krone, while Nick Rees, an analyst at Monex Europe in London, said the currency’s weakness may be hindering a shift in Norwegian policy.
“We suspect Norges Bank will keep its tone relatively unchanged,” Rees said. “While we expect a downgrade to the bank’s inflation projections in light of recent soft out-turns, markets may find these are somewhat smaller than expected.”
–With assistance from Harumi Ichikura and Gina Turner.
©2024 Bloomberg L.P.
