Investment Research 2 May 2017 Norges Bank Preview Unchanged and no new signals Norges Bank (NB) is widely expected to leave the sight deposit rate unchanged at 0.50% at Thursday s meeting and reiterate its on hold stance. With little new information since the March meeting and with no monetary policy report due we expect no new signals in the press release or at the press conference. We expect little market reaction on Thursday. Risk reward favours positioning for a steeper FRA curve and a stronger NOK. Chart 1: Downside growth risks much reduced over the past year Little new information for Norges Bank to react to In March, NB left rates unchanged and reiterated its on hold bias in the statement via The Executive Board's current assessment of the outlook suggests that the key policy rate will most likely remain at today's level in the period ahead. Meanwhile, the rate path maintained a 40% implied probability of a 25bp rate cut and a more low beat view on not least wage/inflation drove a postponement of the first rate hike to Q1 19 (Chart 4). Ahead of Thursday s May meeting: since the March meeting we have received little new information and markets still do not price in any rate cut probability amid a tight housing market. Most importantly, the risk of a rate cut seems reduced even if March core inflation fell 0.13 pp short of NB s projection (Chart 2). The primary reason for the seemingly lower cut probability is the weakening of the import weighted NOK now 2.5% weaker than projected (Chart 12). As imported inflation has been the primary driver of core inflation over the past year, the NOK weakening suggests a much reduced risk of the inflation drop continuing (Chart 3). On the demand side, economic growth, both in Norway and globally, seems to have panned out more or less as the central bank expected. On the domestic side the labour market has looked somewhat stronger than NB pencilled in but, on the other hand, interest rate expectations abroad are lower (Chart 20). House price growth remains high but the last release does suggest a clear deceleration, which is at least partially driven by tighter regulatory measures (e.g. LTI cap of 5). On balance, there is little reason to expect NB to change its signals at this stage. NB will receive several important releases ahead of the June meeting (e.g. inflation, Regional Network Survey, GDP and oil investment survey), leaving NB in a good position for awaiting more clarity on the outlook before modifying its communication. Also Thursday s meeting does not include a new monetary policy report/rate path. Expect little market reaction; but risks are skewed to the upside While we and markets do not expect any market reaction on Thursday s announcement, there is a small probability that NB acknowledges a lower probability of inflation falling further near term and that spare capacity seems lower than projected. As markets contrary to the NB rate path - do not price any rate cut probability, the effect of this communication would be somewhat higher rates in not least 2018 and a stronger NOK. Risk-reward, therefore, suggests positioning for a moderately steeper FRA curve and a stronger NOK, even if we stress the NOK near term has been driven by external developments that seem more challenging. From a long-term strategic perspective, however, we still find value in gradually building up long NOK exposure. Source: Norges Bank, Macrobond Financial, Danske Bank Markets Chart 2: Core inflation still below Norges Bank s projection Source:, Macrobond Financial, Danske Bank Markets Chart 3: but NOK weakening should remove most imminent bearish fears Source: Bloomberg, Macrobond Financial, Danske Bank Markets Chief Economist Frank Jullum +47 45 25 85 29 fju@danskebank.no Chief Strategist Jostein Tvedt +47 23 13 91 84 jtv@danskebank.com Senior Analyst Kristoffer Kjær Lomholt +45 45 25 85 29 klom@danskebank.dk Important disclosures and certifications are contained from page 6 of this report. www.danskeresearch.com
Norges Bank chart pack Chart 4: Rate path suggests a 40% probability of a rate cut; we expect rates to be left unchanged for at least next 12M Chart 5: The Regional Network Survey paints a much brighter picture of the economic outlook Source: Norges Bank, Macrobond Financial, Danske Bank Markets Source: Norges Bank, Macrobond Financial, Danske Bank Markets Chart 6: 2017 oil investments were revised higher ahead of March meeting Chart 7: NB expects GDP growth to slowly accelerate Source: Macrobond Financial, Bloomberg, Danske Bank Markets Source: Norges Bank, Macrobond Financial, Danske Bank Markets Chart 8: Fiscal policy remains expansionary, albeit less so than in 2016 Chart 9: Manufacturing sector seems to stabilise Source: Ministry of Finance, Macrobond Financial, Bloomberg, Danske Bank Markets Source: SSB, Macrobond Financial, Bloomberg, Danske Bank Markets 2 12 December 2016 www.danskeresearch.com
Chart 10: Oil curve little changed since March projection Chart 11: The oil price measured in NOK is also roughly unchanged since the last meeting Source: Macrobond Financial, Bloomberg, Danske Bank Markets Chart 12: The NOK is significantly weaker than pencilled in Chart 13: not least via the EUR, GBP and SEK pp 0.60 0.50 0.40 0.30 0.20 0.10 0.00-0.10-0.20-0.30 I44 Contributions since last MPR (90% of basket) 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% Contribution (lhs) %-Change (rhs) I44 change (rhs) Source: Macrobond Financial, Bloomberg, Danske Bank Markets Chart 14: Markets still don t expect Norges Bank to cut rates Chart 15: US Treasury s cash balance policy has lowered price on USD and thereby narrowed Nibor-Policy rate spread 3 12 December 2016 www.danskeresearch.com
Chart 16: Lending rates reaching a bottom Chart 17: Lending rates have risen over the last quarters Chart 18: Housing market shows signs of cooling, but from very high level Chart 19: Credit growth has risen as expected Chart 20: Foreign rates below NB s expectations Chart 21: Growth outlooks of close-trading partners remain roughly unchanged 4 12 December 2016 www.danskeresearch.com
Chart 22: Core inflation still below Norges Bank s projections but NOK weakening should remove worst fears of a much faster drop Chart 23: than what Norges Bank currently has pencilled in Chart 24: Wage growth has disappointed to the downside Chart 25: Wage expectations Chart 26: Above trend growth and a narrowing output gap is an ideal cocktail for an undervalued currency like the NOK Chart 27: Risk reward favours positioning for a steeper FRA curve 5 12 December 2016 www.danskeresearch.com
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