Norway's central bank meets Wednesday. There is some speculation that while keeping deposit rates steady at 1.25%, the Norges Bank will signal a rate hike for as early as next month. The risk is that market will be disappointed and that disappointment may weigh on the krone. As short-term players take their profits and move to the sidelines, this may create a new opportunity for medium term investors who do not want to chase the market.
While the recession appears to have ended with 0.3% expansion of the non-oil economy in Q2, recent data continues to show the precarious nature of the recovery. This was illustrated by the Aug. PMI which fell back to 42.3 from 50.1 in July.
The Norges Bank need not be in any hurry. The August inflation reading was softer than expected. Month-over-month CPI fell 0.2%, whereas the consensus had expected a 0.1% increase. That brought the year-over-year rate to 1.9% from 2.2%. The core rate declined for the second consecutive month and the decline in July-Aug. nearly offsets the increase of Q2. Moreover, the core rate jumped 1% last Sept., which will drop out of the year-over-year comparison, suggesting further downside pressure on the 2.3% year-over-year core rate when the Sept. data is released on Oct. 9.
The market seems to be getting ahead of itself on how early various policy makers can truly exit their extraordinary policies. This was the case with the Reserve Bank of Australia and may prove to be true with the Norges Bank too. We expect the statement to acknowledge that conditions are generally improving, but to stop shy of signaling an imminent hike. The 5% appreciation of the krone on a trade-weighted basis since July 1 is tantamount to some tightening of monetary conditions, which likely suffices for the central bank's purposes at this juncture.
Disclosure: No positions
