June View Out Of Sync

Written by James Harte from Orbex

In the June MPR, Norges Bank indicated a 100% likelihood of a September rate cut based on their economic forecasts at the time. However, domestic developments since then have deviated from the central bank’s projections and are likely to have a significant effect on their risk assessment at today’s meeting.

Growth  & Housing

There are now clear indications that growth is picking up in the domestic economy, and the risk of a more sustained downturned has now declined. Furthermore, the housing market has tightened dramatically over the summer seeing big price increases, limited supply, and high turnover. This development means that a rate cut is no longer necessary for growth and is less desirable when considering the financial stability risks posed by stoking the housing market.


Looking at inflation then, despite a small drop back in August, CPI remains firm at 4% having moved steadily higher over the year.  Norges Bank has regarded above-target inflation over the past 18 months as a temporary factor fuelled by weaker NOK and weaker Oil prices. With Inflation remaining above both the central bank’s target and projections it is likely to contribute to a higher rate path.

Wage Expectations

The central bank’s latest expectations survey shows a firm increase in wage expectations for next year. As the bank’s latest inflation forecasts are based on wage inflation as a key driver for returning inflation to target, the bank is likely to be sensitive to any indications of cost-push spirals. As an aspect of the bank’s risk assessment, wage growth is again likely to contribute to an unchanged decision on Thursday.


Whilst Oil prices since the June meeting have fallen below the bank’s projected levels the long end of the curve remains stable. Furthermore, the outlook for Oil investment is less sensitive to fluctuations in Oil prices around current levels which should limit the significance to the central bank.  Whilst the Q3 Oil investment survey came out slightly weaker than expected, improvements in other leading indicators should bolster the bank’s view.

Global Factors

In terms of global developments, the key issue to is obviously the UK’s Brexit decision. However, the economic consequences of Brexit appear to have been limited to the UK and the protracted volatility and global ripple effects have not yet emerged.  Despite this however, the bank is likely to still highlight increased global political risks with the UK’s formal exit yet to occur and the US elections coming into sight.

In all, whilst a rate cut cannot be ruled out, it seems unlikely at this juncture. The bank is likely to maintain their easing bias and be very mindful to not send out any Hawkish signals at this juncture with the updated rate path to signal a 50% chance of a rate cut by year end.

FX Impact

An unchanged decision from the Norges bank this week will likely drive a higher NOK rate though forward guidance regarding the likelihood of further easing should cap gains.  The clearest opportunity looks to be to the short side here.

The broad bearish channel that EURNOK has moved in this year has currently stalled along support at 9.1593. A break below this level would open up a test of the bearish channel support alongside longer term bullish trend line support.

Data Flash

The RBA meeting minutes released overnight provided little new information. The central bank noted that their current stance is consistent with achieving inflation target over time and that monetary policy approach is consistent with sustainable growth.

Regarding the domestic economy, the bank was broadly positive noting that that there had been some signs of improvement in parts of the mining industry.  Terms of trad r were noted to have risen in the 2Q whilst forward looking indicators point to little change in the jobless rate.

Looking at the housing market the central bank noted that indicators were pointing to weaker conditions vs a year ago. In terms of global factors, the bank noted that growth eased a little further in China with some easing of growth in financing the real economy in China.

Referring to the currency price, the bank noted that lower AUD was aiding activity but that a higher AUD rate could “complicate the necessary adjustments in the economy”.