We expect Norges Bank (NB) to keep the policy rate unchanged at 0.50% while reiterating the strong easing bias from the March Monetary Policy Report (MPR).
In the MPR from March, NB indicated a 50% probability of a June cut conditioned on no policy change in May. NB also indicated a 100% probability of a cut before Q4 and an additional 20% probability of zero rates.
Developments since March have been close to NB's projections although overall it will be hard for NB to strike as dovish a tone as in MPR 1-16 given the revised fiscal budget, the higher oil price, the lower tail risk of the Norwegian economy falling over a cliff and the latest acceleration in house prices. As a result, we expect NB to marginally lift the rate path but still signal a very high likelihood of a September cut.
Specifically, we expect the revised rate path to signal a 80-90% probability of a September rate cut and a 5-10% probability of an additional rate cut to zero. Conditioned on no cut in June these probabilities were 100% and 20% in March, respectively.
We expect NB to reiterate the message from March on proceeding with greater care in setting rates.
Balance of risk. Overall, we think the risk to our call is very balanced. On the downside, NB could decide on leaving the rate path unchanged but it is difficult to see what should drive a lower rate path. On the upside, NB could fully incorporate the revised fiscal budget and a strong concern with accelerating house prices but as it is very aware of keeping the NOK weak, it is our view that NB is also very aware of not striking too hawkish a tone at this stage.
Market pricing. Markets are pricing in around 2bp worth of cuts for Thursday, 10bp for the September meeting and an accumulated 25bp on a 12M horizon (the point where the most easing is priced in).
FX, rates and fixed income strategy. In isolation, we anticipate a muted market reaction to the MPR release albeit with some moderate support to the NOK. We expect risk sentiment in relation to the coinciding EU UK referendum to be the clear dominant driver for market pricing this week.
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