Norges Bank 25bp rate cut and an easing bias could move EUR/NOK higher

The current rate path from Norges Bank has a 68% implied probability of another 25bp rate cut and a 61% probability of a 25bp rate cut already at the 24 September meeting.

"We expect a 25bp rate cut at the 24 September meeting based on the deteriorating domestic growth outlook, a higher tail risk of the Norwegian economy falling over a cliff as a result of the re-collapse in the oil price and, finally, lower global rates on global growth concerns", says Danske Bank.

In addition to the rate cut, we expect an easing bias with the revised rate path, suggesting a 25% probability of a new rate cut.

Although core inflation is higher than expected, the spike higher has primarily been driven by a faster transmission of a weaker NOK to import prices than anticipated. With a weakening demand outlook and lower wage pressures, we do not believe inflation is a hindrance to a repetition of the Dec 2014 'insurance cut'.

Importantly, rate cut expectation is a close call and cannot rule out a repetition of the March 2015 meeting decision where rates are left unchanged - amid higher-than-expected credit growth - while another rate cut is implicitly guaranteed in the revised rate path.

"Currently, markets are only pricing in10bp worth of cuts for the 24 September meeting and an accumulated 42bp worth of easing on a 12M horizon. As a result, we believe markets underestimate the risk of Governor Olsen lowering the sight deposit rate on Thursday", added Danske Bank.

According to short-term financial models, EUR/NOK should - for a given oil price - move15 figures higher on a 25bp rate cut. Importantly, should Norges Bank decide on leaving rates unchanged while guaranteeing a future rate cut, this would be close to current market pricing and should only have a minor NOK positive effect.