Norges Bank’s main message will be: “On hold”

Norges Bank will announce its interest rate decision on Wednesday 29 August at 14.00 CET. No interest rate forecast will be presented. We see the policy rate on hold at 1.5%.

This view is shared by all analysts. We do not think the bank has considered other alternatives than leaving the policy rate unchanged. Such an outcome is probably priced in and Norges Bank’s wording will decide an eventual market reaction.

Some news since the last MPC meeting pulls in the direction of a more cautious approach to setting interest rates:

• NOK is currently 1 ½% stronger than Norges Bank’s forecast for Q3. That will, if it lasts, pull down interest rates at the most by about 30bp according to calculations made by Norges Bank. Expected interest rates abroad have fallen.

• Core inflation (CPIXE) was 0.2% points below Norges Bank’s forecast in July after 0.5% points below in June. A gap by 0.2% points is, if it lasts, enough to have a small negative impact on interest rates.

On the other hand there is one factor that justifies a more aggressive interest rate approach:

• 3 months money market rates have fallen. We believe Norges Bank will judge the spread between 3 months money market rates and expected key rates to be 25-30 bp lower than forecasted. That argues for a hike in key rates by the same amount. Add to this that other credit spreads influencing bank lending rates have narrowed.

Apart from the above mentioned factors we believe domestic growth figures to be broadly in line with Norges Bank’s view. Euro area growth figures (PMI etc.) have been weak, but remember that Norges Bank had a quite weak euro area forecast in the June Monetary Policy Report. Add to this that Swedish figures have been on the strong side. Overall we believe Norges Bank to view international figures to be broadly in line with its forecast.

A stronger NOK and weaker inflation is to a large degree counteracted by lower money market spreads. Consequently we believe Norges Bank will judge the overall development since June to be broadly in line with its forecast. That will indicate that it sticks to its June interest rate forecast where rates were on hold through 2012 and then very gradually raised. The market is currently pricing in a chance of a rate cut later this year so such a message will be somewhat on the strong side to market expectations. Still we do not think the market will give much weight to that and market reactions will probably be relatively muted if we are right.

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