Norges Bank keeps key interest rate on hold at 1.5 pct, likely to stand pat in near future

The Norwegian central bank, Norges Bank, kept the key interest rate on hold at 1.5 percent today, as was widely expected. The central bank adjusted the rate path somewhat down in the front end, suggesting lower likelihood of a rate hike in the first half of 2020. Nevertheless, the hiking bias is still present, and the rate path is now a few basis points higher in the period 2021-2022. This suggests a 40 percent likelihood for a hike in the second half of 2020 or 2021, noted Nordea Bank in a research report.

The Monetary Policy Report’s main message was on part with expectations. Lower than expected domestic demand argues for a lower path. Meanwhile, increases oil prices and rates abroad, a lower money market premium and NOK staying soft are the main reason why the rate path is a bit higher than the one from September.

“Going forward, among the factors that will be important to observe, we note the impact the weak NOK will have on price and wage inflation”, said Nordea Bank.

The central bank sees restricted pass-through from a soft NOK to wage and price inflation. If this pass-through should increase, this would be regarded as an upside risk to the current path rate. Meanwhile, the Norges Bank assumes the NOK to stay soft. Lower uncertainty pertaining to international developments might result in increased oil prices and a lower risk premium for NOK, which might result in a stronger NOK.

“In this case, it will be harder for Norges Bank to turn more hawkish. All in all, the NOK effect is likely to matter more than upside risks of wage growth over the next 3-month period. Overall; we are assured in our forecast that Norges Bank will be on hold for the foreseeable future”, added Nordea Bank.