Norges Bank To Signal 2021 Rate Hike?

With nearly all other central banks in the G10 space reaffirming their commitment to maintaining accommodative monetary policy, there is an interest shift underway at the Norges Bank which is worth highlighting ahead of the bank’s March meeting tomorrow. While the bank is broadly expected to keep its policy on hold at tomorrow’s meeting, there is a lot of chatter and expectations around its rates forecasts, with many investment banks now looking for the Norges Bank to adjust forward its projections to signal a hike this year.

Firm Recovery Underway

The country has been a strong performer in the European space over the last year, weathering the pandemic far better than many of its peers. As of January, GDP is only down 1.5% from pre-pandemic levels, fat exceeding the recoveries underway on the continent. With restrictions due to ease their over coming months, there is plenty of room for the recovery to accelerate even further, lifting inflation as it does.

Inflation Rising Firmly

The strident recovery rally in oil prices over recent months has been a big boost for the Norwegian economy, helping lift exports and drive trade revenues. The rise in oil prices has also driven firm inflation with headline CPI rising to 3.3% in February from the 0.7% seen in November last year. While, as with other central banks, the Norges Bank might tolerate an inflation overshoot in the short term, with inflation now running above target for 2 months and likely to increase further, the need for a hike is growing.

Two-Way Risks Around Guidance

With growth prospects at home and abroad now looking firm into Q2 and beyond and with oil prices continuing higher here, the hawkish risks are clear. If the bank brings forward its projections to signal a hike this year this is likely to drive NOK further higher against its main trading counterparts. On the other hand, given the rising inflation and the building expectations of such a shift in guidance, if the bank take a more tempered approach and fails to signal a shift this year, this could see NOK recoiling sharply.

Technical Views

EURNOK

The breakdown below the 10.4104 level in EURNOK has seen price trading lower within a bearish channel formation. The downtrend has seen price recently breaking down below the 10.2048 level with the decline stalling just ahead of testing the 10.0069 level. While 10.2048 holds as resistance, look for a continuation lower towards the 9.8169 level.

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