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Norges Bank likely to hike key interest rate by 25 bps in September

The Norwegian central bank, Norges Bank, is set to meet next week for its interest rate decision. According to a Nordea Bank research report, the central bank is expected to hike its key rate next week and signal a small likelihood for another hike later in the forecast period. Market is currently pricing about 50 percent probability for a rate hike.

The Norges Bank had signalled in the in-between meeting in August, where the Bank said that it in the short-term would stick to the latest rate path from June. The June path showed an 80 percent probability for a rate hike in September. New information since the meeting in August is unlikely to have changed the central bank’s view. The domestic picture has not changed much since the August meeting and the NOK continues to be soft. Moreover, the uncertainty regarding international developments has if anything slightly weakened. Therefore, Norges Bank might hike its key rate by 25 basis points to 1.50 percent.

Developments in the domestic real-economy have been consistent with Norges Bank’s expectations. The latest Regional Network report shows that growth in the economy continues to be high. Nevertheless, growth is expected to slow down less than Norges Bank had forecasted in June. The same is the case with employment. Both factors might argue for an upward contribution to the rate path.

“Still, with other labour market indicators such as registered unemployment somewhat on the weak side, we expect overall no contribution from the “domestic demand” factor in the changes to the policy rate path (interest rate account)”, stated Nordea Bank.

Following the next week’s decision, the krone is expected to strengthen and FRAs to be lifted. The NOK has already gained a bit lately. And this is perhaps partially because of the upcoming meeting.

By Aditi Awati
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