As expected, Norges Bank (NB) left the sight deposit rate unchanged at 0.50% this morning. Also as expected, the Board was slightly more hawkish than last time and now signals a 25bp rate hike in September:
'The Executive Board's current assessment of the outlook and balance of risks suggests that the key policy rate will most likely be raised after summer 2018'.
The rate path published in the Monetary Policy Report (MPR) was adjusted upwards from Q3 18. Specifically, the rate path supports the signals from the Board, and implies a rate hike in September 2018, compared with December in the last MPR. The rate path also suggests roughly two 25bp hikes in both 2019 and 2020 (chart 2).
As expected, the main positive effects on the rate path came from a domestic growth and global interest rates (chart 5 and table 1). NB adjusted the forecast for mainland GDP upwards in 2018 from 2.3% to 2.6%, mainly due to higher private demand (consumption and investments). On the other hand, lower wage growth and inflation pulled in the opposite direction. Also, higher money market premiums pulled the rate path downwards. More interesting, Norges Bank stated that the lowering of the inflation target from 2.5% to 2.0% contributes to somewhat lower rates from 2019 and throughout the forecast period.
Also, according to NB, the uncertainty surrounding the effects of changes in interest rates when rates are close to zero calls for a more careful approach. In isolation, this pulls the rate path downwards by 6bp in 2018. Without this, the rate path would have indicated a 50% probability of a rate hike already in June.
As the forecasts in the monetary policy are well in line with our own, we now expect NB to hike rates in September 2018, compared to our previous forecast of December.
FI/Rates . Our NOK IRS 'Barbell', i.e. selling NOK IRS 3M SEP18 and NOK IRS 3M DEC 18 and buying NOK FRA IRS SEP18 performed well, given signals from Norges Bank of a higher probability of a hike in September and a flattening of the curve due to the change in the inflation target (chart 3). The potential in this strategy going forwards is mainly related to a normalisation of the 3m Nibor versus sight deposit rate. Current spread is about 55bp. Norges Bank assumes a spread of 45bp during the spring and 40bp during the autumn. A development such as the Norges Banks projection should support our strategy and we keep it open for now.
Our outright strategy of higher NOK IRS 2Y/1Y performed moderately positively (around 3bp) on Norges Bank as the first hike was moved forward but the rate path was moved less upwards for end 2020 and the path for 2021 was slightly lower than we expected. We keep the strategy open and reiterate our target of 2.25%. That is, the additional upside potential is somewhat restricted (originally opened at 1.915%).
FX . EUR/NOK has fallen on the announcement. The break of the 9.5262 support levels opens up for a move towards the set of support levels around the mid-to-low 9.40s. Fundamentally, we still like the strategic case of being long NOK. That said, we think the recent development in NB pricing means we are moving closer to a time where we contemplate taking profit on our short EUR/NOK, long NOK/SEK positions. If we take profit it should be seen as a tactical consideration as our fundamental predisposition would remain to re-buy NOK on dips.