Norges Bank tentatively on hold but signal one more cut in Q4

The Norges Bank is expected to keep policy unchanged at its September meeting (consensus: 1.00%), despite Norway's weak near-term growth outlook. Three reasons are identified for why Norges Bank may stay its hand. First, this would give them some bandwidth to ease policy at a later stage, should downside risks to growth materialize further, in the context of a China-driven slowdown. Second, the pronounced NOK depreciation (around 4% real trade-weighted depreciation) since the June meeting has eased monetary conditions somewhat, effectively undertaking some of the easing already. Additionally, past NOK weakness has passed through to inflation which has recently been rising, but remains anchored. Third, the Bank remains highly concerned about financial stability considerations which continue to steer its reaction function. As a result, the Bank is expected to refrain from easing policy at this stage but signal one more cut by year-end, should the need arise. 

"We expect modest NOK outperformance, given current market pricing. Finally, our commodity currency relative value analysis suggests that the NOK may be the least vulnerable G10 commodity currency to Dutch Disease, but Norway's proximity to the euro area and our forecasts for EUR downside, imply further trade-weighted NOK depreciation in the coming quarters," says Barclays.