As widely expected, Norges Bank kept the policy rate unchanged at 1.50%. However, Norges Bank no longer sees a probability of a rate cut in 2015. This was a surprise for the market given that the front FRAs priced in a high probability of a rate cut over the next 12 months. Hence, we have seen the whole FRA curve being lifted up some 8-10bp in 2015. The rate path was revised lower in 2016 and 2017 and Norges Bank now sees a first rate hike in 2016.
The removal of the cut probability reflects the higher inflation and weaker NOK. But given the drop in global rates, it was still a bit of a surprise to us especially as the cut probability in June was due to the more uncertain outlook for oil investments. Anyway, Norges Bank has now posted a clear signal that it is on hold. Furthermore, it has confirmed that rates will start to rise at the beginning of 2016 - earlier than expected prior to the announcement.
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