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On inflation, the statement was also hawkish
compared to the previous one. The Bank once again
mentioned its expectation of underlying inflation to
"edge down further in the period to summer". But the
Governor also stated that inflation is expected to
move up again "as activity level increases and the
effects of the krone appreciation unwind". In its
March statement, the Norges Bank only chose to
mention downward pressures on inflation in 2010,
due to a stronger krone and lower wage growth.
That market forecasters expect policy rates to remain
low for some time to come in the US, eurozone and
the UK was stated in the in-depth assessment. But
unlike last time, the Norges Bank did not mention the
rate differentials that are likely to put upward
pressure on the krone. Also, the appreciation in the
import-weighted NOK, which was stronger than
projected in the March Monetary Policy Report, was
acknowledged. But this appears not to have had an
impact on the Norges Bank decision.
Chart 3: Credit to Households and House Prices
(% y/y)
Source: Reuters EcoWin Pro
Chart 4: Import-Weighted NOK
Concern over developments in the eurozone
Despite an overall positive tone, the statement
revealed that the developments elsewhere in Europe
are clearly a cause of concern for the central bank.
Therefore, the Norges Bank also considered keeping
the policy rate unchanged, as discussed in the indepth
assessment:
• "Developments in Europe may prove to be
weaker than assumed and the turmoil in
financial markets may persist”;
• “…the krone may prove to be stronger than
projected so that inflation remains low for a long
period”; and
• “The risk of a renewed downturn in Europe may
suggest that it would be appropriate to leave the
interest rate unchanged at this meeting".
However, the fact that domestic developments were
broadly in line with its expectations, household credit
growth is robust and house prices continue to
increase weighed more in the Norges Bank
assessment, leading it to deliver a rate hike in line
with its projections back in March.
Conclusion
We expected the Norges Bank to remain on hold at
the May meeting. Back in March, its new policy rate
projections suggested that the Norges Bank intended
to deliver a 25bp rate hike in May. We highlighted
that developments in the domestic economy did not
give any significant reason for the Norges Bank to
change this assessment. But in March, the Bank
seemed to be more cautious about external
developments. Since then, external developments
Source: Reuters EcoWin Pro
have evolved significantly. Concerns over the high
debt countries have led to an increase in stress in
financial markets. This in turn led to an increase in
uncertainty surrounding the outlook for the
Norwegian economy. Therefore, we believed this
was likely to lead the Norges Bank to sit on its hands
at the May meeting.
Looking ahead, given that the Norges Bank delivered
a rate hike at the May meeting, we now expect the
policy rate to remain unchanged until September.
The fact that the Norges Bank mentioned the
increase in uncertainty surrounding the Norwegian
economic outlook, due to the developments in
Europe, also suggests the Bank will deliver further
rate hikes more slowly than it projected previously.
On this, at the press conference, Governor Svein
Gjedrem was quoted as saying “the debt crisis would
have an indirect impact (on Norway) as it could
reduce interest rate expectations in the euro region”.
Gizem Kara 7 May 2010
Market Mover
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