As expected Norges Bank (NB) cut rates by 0.25pp to 1.00%.
It also presented a new rate path that indicates a roughly 60% probability of another rate cut by end-December. This was a bit more aggressive than market expectations.
The rather dovish tone is entirely the result of a lowering of domestic growth projections for 2015 and 2016, despite an upward adjustment in the oil investment projection.
Hence, as we still expect domestic growth to do better than projected by NB, we stick to our view that rates will remain at 1.00%.
Market reaction: rate curve lower by a little more than 10bp across the curve.
FX outlook: EUR/NOK higher following announcement. Very short-term risks are skewed to the upside as markets price easing. Medium to longer term we still expect a stronger NOK. We lift 1M and 3M forecasts to 8.65 (from 8.60) and 8.50 (8.45), respectively.
FX strategy: we still see value in positioning for a stronger NOK. We remain short EUR/NOK in the Danske Bank FX Trading Portfolio.
Fixed income: value in buying short-end NOK FRAs.
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