Market Outlook - BNP PARIBAS - Investment Services India

1.2% m/m in November, partly offsetting an increase
in October. On a 3m/3m basis, sales are now up
0.7%, a deceleration from 1.0% in October and
below the recent peak of 1.8% in July. Manufacturing
production, on the other hand, is on an upward trend.
The 3m/3m rate has risen consistently over the past
five months. In November, production was up 2.3%
from 2.2% in October, well above the trough of
-3.4% in February. In terms of surveys,
manufacturing PMI in December nudged up into
expansion territory, the first time it had been above
50 since July. However, the index was revised down
recently from 50.4 to 47.2, back to signalling
contraction in the sector.
Overall, as economic data since the last policy
meeting have not been stronger than the market and
the Norges Bank were expecting, they should not,
alone, warrant a change in the Norges Bank’s initial
intention to deliver rate hikes gradually. Also, the
import weighted NOK has strengthened somewhat
since the last policy meeting. It was up as much as
2% in mid-January, while on Wednesday it closed
around 0.4% higher than its level in mid-December
(Chart 4).
Lending rates, credit growth and house prices
Since December, there has been survey evidence
that bank lending rates have increased further. In
particular, the country’s biggest lender said in mid-
January that it will raise interest rates on home loans
by 25bp, effective March 10. Given this move comes
from the biggest lender, the smaller lenders are likely
to raise their lending rates accordingly. We believe
this gives a reason to the Norges Bank to pause in
February, as the increase in rates shows that the
policy rate hikes are having an impact.
The recent data on credit, on the other hand, showed
that credit to households continued to grow in
November. On house prices, the Norges Bank had
already mentioned its concern in the previous
statement that “house prices are rising sharply”. In
Q4, house prices were actually flat q/q in Q4, while
because of base effects, they were up 11.6% y/y
(Chart 5).
What next?
We highlighted after the December meeting that
whether or not the Norges Bank will deliver a rate
hike at its next meeting in February will depend on
developments in bank lending rates, economic data
and the krone (see Norway: Need for Higher Rates,
Market Mover, 18 December 2009). We noted that if
bank lending rates increase, showing an impact from
October and December’s rate hikes, the chances of
further monetary tightening in February will diminish.
The evidence since then suggests the Norges Bank
is likely to keep rates on hold at its meeting next
week. The fact that bank lending rates are increasing
Chart 3: Manufacturing Production & FMCI
Source: Reuters EcoWin Pro, BNP Paribas
Chart 4: Import Weighted NOK
Source: Reuters EcoWin Pro
Chart 5: Household Credit Growth & House
Prices (% y/y)
Source: Reuters EcoWin Pro
should give comfort to the Norges Bank that its policy
rate increases are now being passed onto
consumers, as strong growth in private consumption
was one of the points flagged up in the December
policy statement.
We therefore believe the next rate hike will come in
March. That said, we believe a rate hike at the
February meeting can still not be ruled out, given the
policy rate is much lower than what current levels of
growth and inflation would normally require.
Gizem Kara 29 January 2010
Market Mover
19
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