As expected, Norges Bank (NB) this morning left the sight deposit rate unchanged at 0.50%.
The revised rate path still has a 100% implied probability of a 25bp rate cut in H2 16. As NB only publishes the rate path with two decimals, we have a 70-100% implied probability of the cut coming at the next meeting in September. The implied probability for zero rates in Norway was cut from 20% in March to 0% in today's Monetary Policy Report.
Market reaction. Prior to the decision, markets had priced in around a 10% probability of a rate cut today. Post the decision, short-term rates have risen slightly but markets still price in close to a full rate cut on a 12M horizon. EUR/NOK has fallen moderately as expected.
Our expectation. Overall, the rate path was marginally more hawkish than we expected, as we believed NB would keep a small (5-10%) probability of a cut to 0%. Overall, we think today's decision supports our call that NB will cut the sight deposit rate by 25bp to 0.25% in September and that this will mark the final cut in this cycle.
FX. The short-term NOK outlook will be closely tied to the result of the UK's EU referendum. In our view, a 'Brexit' would send EUR/NOK higher by 20-25 figures while a 'Bremain' would lower the cross to 9.20-30. Irrespective of the vote, we think the NOK upside potential will remain the largest on a 6-12M horizon.
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