Norges Bank unlikely to further cut key rate on optimistic economic outlook

Norwegian central bank, the Norges Bank, had hinted at an additional rate cut for 2016 despite high levels of inflation. But as the Norwegian economy and inflation rose more markedly than it had assumed at the time it decided against this step during its September meeting. Instead, it raised the rate trajectory and now forecasts the key rate to stay at current levels, noted Commerzbank. As a result, the Norwegian krone appreciated markedly.

The central bank’s decision to not ease the monetary policy further is probably more due to the rebound in economic outlook and less due to higher inflation, according to Commerzbank. The central bankers indicated that the possibility of a rate cut continues to be higher than that of a rate hike. Furthermore, Norges Bank continues to keep its view that inflation would slowdown due to the weaker economy and the waning effect of exchange rate.

It is unlikely that the central bank would lower its key rate further that would generally help the NOK. The main reason for this assumption is the more optimistic economic outlook, stated Commerzbank. There are still increased inflation risks given the still expansionary monetary policy and strong economic growth.

Certain scepticism continues to be there regarding whether the Norges Bank would respond to continued high levels of inflation with a more restrictive monetary policy at the expense of the economy. Therefore, an overshoot in inflation continues to be the biggest risk for NOK. The Norwegian krone is expected to mainly strengthen against the EUR as the ECB would most likely continue to ease its monetary policy. On the other hand, as the U.S. Fed would continue to gradually hike its key rate, based on the speculations, the NOK is likely to depreciate against the USD, added Commerzbank.