A stunning hike by Norges Bank today, with a 50bps move to 3.75 per cent.
Admittedly, consensus was split, but it was clear something needed to be done to curb price increases. A further 25bps on top of the one markets had expected looks increasingly probable.
Here’s Citi:
In an even more hawkish spin, the rate path was lifted more than we had expected, to show the policy rate now peaking at 4.21% by 4Q-23 up from 3.60% in the March MPR forecasts. We had expected the new rate path to peak at around 4.0%, in line with our own forecast for the terminal rate. The rate path is now consistent with a 25bp hike at the August interim meeting and almost another 25bp in September. The much higher rate path (an unusually large shift over just three months) suggests that today’s surprising 50bp hike is not simply a catch-up to higher-than-expected realised inflation, but rather a more fundamental re-assessment of how tight monetary policy needs to be to bring down future inflation.
Goldman also expects 25bps in both August and September.
Ida Wolden Bache and the gang have come under hefty pressure to protect the long-suffering krone, which has traded weaker than expectations while inflation has continue to come in hot (March CPI was 1.3pp above expectations at 6.7 per cent). Graph via ING of how projections now stand:
Rate-setters hands’ have been slightly tied by their own model, ING analyst notes:
Not only has the central bank gone further than that at this meeting, but it is now signalling a peak rate of 4.25% later this year – some 60bp higher than previously anticipated. By historical standards, that’s a pretty big revision.
To some extent that’s not surprising, given that the last set of forecasts came amid the US banking crisis. Global interest rate expectations have since recovered, which mechanically pushes up Norges Bank’s forecast for its own policy rate. NOK was as much as 5.5% weaker at the end of May on a trade-weighted basis, relative to what the central bank had been assuming back in March, though that difference has narrowed over recent days. That weakness also requires higher rates, according to the bank’s model.
All in all, it’s tough times for one of Scandinavia’s best-known countries. Alphaville would hate to be Norwegian right now.
Further reading
— Live news: Bank of England and Central Bank of Turkey raise rates (FT)
— Robin goes on pat leave (Twitter)
Source: Economy - ft.com
