In Norway, A Dovish Lift Off

On Thursday, Norway hiked rates for the first time in seven years.

This was widely expected, but what wasn’t expected was the apparently “dovish” rate path tipped by the Norges Bank.

At the press conference, Governor Oystein cited “limits” to how quickly the central bank can raise rates. “There’s a small probability for a hike in December,” he said, but noted that “probably”, there will be rate hike during 1Q 2019. He cited the currency and the “international situation” as factors that need to be taken account of as the bank attempts to normalize policy.

“We had expected Norges Bank to: i) continue projecting just one hike this year and; ii) deliver a 8bp upward revision to the projected rate for year-end 2020 and about 12bp for year-end 2021”, Barclays wrote this morning, before delivering the following assessment of the dovish forward guidance:

Instead, the bank’s path was revised somewhat lower to 1.22% by end-2019 (vs. 1.26% at the June MPR), 1.64% by end-2020 (vs. 1.72% at the June MPR) and 2.09% by end-2021 vs. 2.18% at the June MPR. The main factors behind these downward revisions appear to be prospects for domestic demand and wage growth. In particular, the bank emphasized that the somewhat slower-than-expected rise in house prices was dampening domestic demand somewhat, while it, too, joined the chorus of central banks highlighting that global growth prospects since earlier in the year have weakened somewhat. For a small open economy like Norway, this implies lower import growth among its trading partners and hence reduced demand for Norwegian exports. Moreover, the bank revised lower its expectations for wage growth this year, citing somewhat lower business profitability. This is expected to dampen price pressures despite the recent rise in inflation, which we expect to persist.

Danske Bank concurs. “This is a return back to what we have seen earlier”, the bank’s Frank Jullum said, adding that “when the market is discussing a too aggressive tightening of the rate path they backtrack because they are afraid of a too strong currency.”

If it was a dovish FX reaction the Norges Bank was looking to engineer, well then mission accomplished. The krone nosedived, with EURNOK quickly paring losses and shooting to a day high:


“A December hike is unlikely”, SEB’s Erica Blomgren said in a note, before predicting the next hike in March and adding that “there’s no doubt that Norges Bank sees it necessary to raise rates gradually in coming years.”

Yes, “there’s no doubt”. But there’s also “no doubt” that Norway wants to be cautious. Governor Oystein gave an interview to Bloomberg TV on Thursday and while chatting with the network’s Francine Lacqua, Oystein said Norway is “very eager” to emphasize the expected “gradual” pace of hikes.

It’s always the same story: Nobody wants to hike and then see their currency strengthen materially at the possible risk of undercutting the domestic economy.

Then again, nobody wants to risk bumping up against the next rough patch without having replenished the counter-cyclical ammo, either. At the end of the day, that’s the more important concern, or at least it should be.

“[I hope] normalization of rates comes before the next downturn”, Oystein said at the press conference.

Me too.


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