The next stop on this month’s central bank trail is the Norges bank meeting due on Thursday which is drawing focus as the bank is expected to raise rates for the first time since 2011.
Oil Prices Supportive
One of the key drivers behind this expected move is the strength of the Norwegian economy which is continuing to grow, fuelled by the oil sector. Indeed, the latest survey of the oil industry signals expectations of a further rise in investment over the next few years with the most recent regional survey also highlighting strong momentum. Oil prices are now up by around 4% since the Norges bank’s last projections in June.
Inflation has been another critical supporting factor with headline CPI having pierced above 3% over the summer, primarily fuelled by buoyant energy markets. Indeed, core CPI has also risen, touching 1.9% in August. With these moves in inflation well ahead of the central bank’s forecasts, we are likely to see a substantial upward revision at this meeting which should also raise the interest rate forecast.
Another element signaling the likelihood of a rate rise at this meeting is the recent weakness in the Krone. The trade-weighted Krone index has been lower over 3Q than the bank was forecasting in June by around 1.5%. This currency weakness along with rising energy prices and strong inflation creates a robust environment in which to raise rates.
External Developments Not Yet A Significant Worry
While external developments such as ongoing trade disputes and weakness in emerging markets, which have the potential to affect oil prices, are clearly a risk factor for the Norges bank, it is likely that, in line with what we have heard from other central banks such as the ECB and the Riksbank, that the Norges bank will not be too worried as yet. Furthermore, the potential for resolutions to these disputes continues to rise with the US and China agreeing to re-start trade talks.
The bank gave a clear signal at its March meeting, and the market is widely expecting the bank to follow through and raise rates between 0.25% and 0.75%. The more interesting factor will be what signal the bank gives the market about the future rate path.
With economic developments since June showing evident strength and with domestic financial conditions slightly looser due to the weaker Krone, there is a reasonable likelihood that the bank revises its rate forecasts higher.
The rate path projected in June signaled two hikes per year between 2019 – 2021 with some risk that the second hike comes early in December of this year. With this in mind, it is likely that we could see next year’s forecast upped to three hikes.
However, it is worth noting that there are still obstacles for the Norges bank, namely the high level of household indebtedness. The Norges bank has also voiced concerns over the potential for its first rate hike, following an extended fallow period, to have disproportionate effects which could harm the economy rather than help it. However, as we have seen with other central bank’s who moved on rates for the first time since the global financial crisis (The Fed, BoE, BoC) once the first hike is in place and it can understand the effects better, the bank is likely to press ahead, meaning that the potential for a second hike in December is very much live.
For now, USDNOK is sitting on rising trend line support from the year to date lows. If we see a break lower here, the first key support will be the 8.1311 region which saw a raft of lows over July and August. Below there, the major support comes in between 7.9665 and 8.006 which was a big zone of support earlier in the year and likely to see some technical buying kick in if retested.