As widely expected, the Norges Bank decided to leave rate unchanged at 1.25% at today’s monetary policy meeting.
However, in the statement released at the end of the meeting, the Norges Bank announced that it considered the alternative of increasing the key policy rate at today’s meeting. The Norges Bank highlighted that activity in the global economy and Norwegian economic growth have been stronger than projected in the Monetary Policy Report 2/2009 (published on17 June). Core inflation has been around the 2.5% target despite the increase in the Norwegian Krone and the slack in economic activity.
With international financial markets recovering and Norwegian house price close to the 2007 historical high, the Norges bank is likely to begin removing its ultra-expansionary monetary policy in the short term.
Following today’s monetary policy’s assessment, the Norges Bank is very likely to increase rates at 28 October Monetary Policy Meeting, with a 50bp rate high that is a clear possibility. The Monetary Policy Report due for publication the same day will give more hints on the monetary policy outlook in the following months.
Should the Norges Bank begin to increase rates in October, the Norges Krone is very likely to appreciate in the medium term. With both the Fed and the ECB likely to leave rate unchanged for many months, the interest rate differential will become more favorable to Norwegian Krone in the next few months.
Economic activity is also likely to hedge up strongly in Norway thanks to fiscal stimulus, increasing productivity differential with the Euro zone. Should the oil prices resume an upward trend, the Norwegian Krone will be a strong buy.
