As we expected, Norges Bank this morning decided to cut the sight deposit rate by 25bp. The revised rate path, however, was even more dovish than what we had anticipated suggesting a high likelihood of another cut.
The revised rate path has a 64% implied probability of another 25bp rate cut on a 12M horizon. The rate path, however, also suggests that the sight deposit rate will not be lowered further in 2015.
Market reaction: Prior to the decision markets had not expected a rate cut with only c.7-8bp priced in. Post the decision markets now price in roughly 14bp accumulated for Q4 and c. 27bp on a 12M horizon, i.e. markets dont believe that todays rate cut will for certain be the last in 2015 and that rates eventually will be lowered further.
Our expectation: Based on our own above-consensus view on the oil price and hence the domestic economy, we actually expect NB to be on hold throughout 2016, and the first hike to be delivered in early 2017. We do, however, acknowledge that we will need to see a bottoming in the Regional Network Survey outlook score for Norges Banks GDP forecast to hold. If this is not the case we could see another cut, even likely before NB projects.
FX: the NOK has weakened slightly more than expected as a result of the softer-than-expected rhetoric. Short-term relative rates and the risk premium in NOK will cap the NOK upside potential. Long-term the NOK remains significantly undervalued and we should see a stronger NOK when the business cycle turns. We maintain our forecasts for EUR/NOK at 9.40 in1M, 9.40 in 3M, 9.25 in 6M and 8.80 in 12M.
Fixed Income: We still see some value left in the Norwegian government curve given the significant underperformance seen over the last month, which has not fully been reversed today. The front FRAs seems fairly priced from a strategic view, but still possible to price in more easing.
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