We expect Norges Bank (NB) to keep the sight deposit rate unchanged at 0.50% at Thursday's meeting and over the next 12 months
Economic activity data have been encouraging over the past months. The Regional Network Survey points to stronger growth, unemployment is falling and oil investments have been adjusted upwards. In addition, the housing market continues to tighten. On the other hand, inflation has surprised significantly to the downside. Hence, we expect the Board to reiterate a 'neutral' bias.
The developments since the December meeting suggest an upward revision to the rate path. However, the recent drop in inflation will probably be sufficient to keep a 10-20% probability of another rate cut before year-end.
The risk to our call is skewed to the upside, as diminishing downside risks to growth and continued upside risks from financial stability could remove the possibility of a rate cut.
Markets price unchanged rates on Thursday and roughly one hike at the end of 2018. We suggest selling NOK FRA 3m DEC 2017 and buying NOK FRA 3m DEC 2018. Strategically, we recommend building up NOK longs but tactically we prefer a cautious stance ahead of the Fed. Look to sell EUR/NOK around 9.25-9.30.
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