Inflation has returned as a key factor for Norges Bank's rate setting which alongside accelerating house prices have casted doubt over the outlook for additional rate cuts.
We think the re-pricing of monetary policy is premature especially given the latest rise in Nibor interbank rates that has driven an implicit monetary tightening in Norway.
The coming month's data will be crucial. At this stage we still think NB will increase NOK liquidity over the coming months and/or cut the sight deposit rate in September.
In June NB guaranteed a rate cut in September. If we look at the various factors that affect the rate path this would only suggest a marginally higher rate path.
A substantial change in the risk assessment of inflation and the housing market could justify leaving rates unchanged. However, unchanged policy would not only ratify the monetary tightening from higher Nibor fixings, but would also drive additional monetary tightening via substantial NOK appreciation.
FX and FI strategy: we think risks are asymmetrically skewed towards lower NOK rates and a weaker NOK. From a risk reward perspective we therefore find value in receiving 2Y2Y outright or selling the front FRAs. One could consider receiving (selling) 6M FRAs given the significant widening between 3M and 6M NIBOR. In FX markets we look to buy EUR/NOK when current NOK-momentum fades.
To read the entire report Please click on the pdf File Below