MARKET MOVER - BNP PARIBAS - Investment Services India

Norway: Norges Bank to Wait and See
• Domestic economic developments support
the case for a rate hike next week.
Chart 1: 3m NIBOR – Policy Spread (%)
• However, the Norges Bank is likely to wait
and see, mainly due to the marked increase in
uncertainty regarding external developments.
• A hold would represent only a pause before
the next hike, in our view. We believe the
strength of economic data will lead the Norges
Bank to deliver a rate hike in September.
The Norges Bank in June kept its key policy rate at
2.25%, but the accompanying policy statement was
relatively hawkish compared to May’s. The Bank also
revised up its short-term rate profile slightly.
Significantly, it indicated that the next rate hike
should come in Q3. As we noted back then, June’s
hawkish statement increased the chances of a hike
in August, with developments in the krone and
economic data key to the timing of the next hike.
Improvement in domestic economic conditions…
Developments in domestic economic conditions
since the last policy decision favour a rate hike. On
the consumer and production sides, signals from
recent retail sales and manufacturing production
figures have been supportive of the Bank’s
expectation of stronger growth in the second half of
the year. Given surveys tend to lead activity data, the
developments in manufacturing confidence are
encouraging. The manufacturing PMI, despite the
moderation seen in many other advanced
economies, remains broadly stable at well above the
50-breakeven level. In addition, financial and
monetary conditions in Norway are still not tight,
remaining supportive for investment and therefore
production.
Furthermore, relatively low interest rates continue to
spur credit demand. The Norges Bank’s Survey of
Bank Lending for Q2 showed that both household
and corporate credit demand continued to increase
over the quarter. Lending to households and
corporates also continued to grow, albeit at a modest
rate.
In terms of inflation, recent CPI-ATE inflation figures
have been lower than the Norges Bank’s projections,
although lower air fares are the main reason for this.
The recent data are therefore unlikely to lead to a
major change in the Norges Bank’s assessment of
inflation, in our view.
Source: Reuters EcoWin Pro
…but increased uncertainty elsewhere
In contrast with the strengthening in economic
activity in Norway, developments elsewhere have not
been encouraging. Tensions in financial markets due
to the broader eurozone fiscal crisis are still acute.
Meanwhile, weaker global manufacturing activity and
US economic growth point to some moderation in
global growth.
Conclusion
Further strengthening of domestic economic
conditions support the case for a rate hike at the
Norges Bank’s meeting next week. However, we
believe external developments since the last policy
decision are likely to make the Bank cautious. The
strength in the krone and rise in money market rates
since end-June add weight to this view. The importweighted
NOK has appreciated by around 2% and
the 3-month interbank-policy rate differential has
widened by 35bp to 89bp, reaching its highest level
since May 2009 (Chart 1).
Advanced country central banks, such as the ECB,
are likely to remain on hold for some time. As such,
the Norges Bank will not be willing to deviate too
much from them in terms of policy rates – due to
concerns over the krone. Hence we expect the Bank
to remain on hold at its August meeting. This would,
imply only a pause before the next rate hike,
however. We believe the strength of economic data
will lead the Bank to deliver a hike in September. The
risk to our forecast is that the Bank delays the next
hike beyond September, if the negative spill-over
effects of the external developments on Norway are
more than our expectations and/or the krone
appreciates significantly.
Gizem Kara 4 August 2011
Market Mover
20
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