Summary:

• Norwegian central bank leaves rates on hold as expected
• Projected path of interest rate hikes has been raised
• Two more reasons why Norges Bank is no in a rush to hike rates any time soon
• Bond market suggests higher USDNOK, it could be tricky though

Of course the Norwegian Bank had no a chance to overshadow the FED’s decision but it drew some attention as well even as rates were left unchanged as it was widely expected. The NOK seems to be fond of the Norwegian Bank’s verdict and is rising against the greenback quite noticeably. What was the reason for that a move? The higher path of projected interest rate hikes – as simple as that. Nevertheless, there is nothing to change the Norges Bank’s view any time soon and convince it to hike rates before long.

Paths of projected interest rate hikes have been lifted compared to the June’s forecasts. Source: Norges Bank

First of all, inflation forecasts were little changed. The Norwegian central bank still sees 2017 core CPI at 1.4% while the next year’s core inflation is seen at 1.5% compared to 1.6% in June. Thus, inflation is forecast to hover below the price target at 2.5%. However, market participants focused entirely on the updated path of future interest rate hikes which is higher. However, needless to say that it’s a side-effect of higher market rates abroad to some extent and there is little evidence that the Norges Bank will begin normalizing its policy in the nearest future.

House prices in Norway have fallen substantially since the beginning of the year. Source: Norges Bank

Moving on we may outline two reasons why the Norges Bank is not in a rush to kick off raising rates. Firstly, there is nothing surprising that house prices rise in environment of low real interest rates, at least that’s the case when there are no any macro-prudential measures targeted to curb elevated prices. That’s an issue for each central bank which walks a tightrope between inflation and financial stability. Nonetheless, it appears that it’ll be no longer a dilemma for the Norges Bank as house prices have declined perceptibly since the beginning of this year.

On the other hand, a debt level remains an issue anyway but its further gradual increase should reverse in conjunction with dropping house prices. On that front the Norwegian policymakers underlined that it would take time for household vulnerabilities to recede. Either way, that’s a strong reason discouraging the Norwegian central bank from start increasing rates for the time being.

Real wage growth in the Scandinavian economy remains lackluster which could hold down inflationary pressures. Source: Macrobond, XTB Research 

Admittedly the wage data from Norway is released quarterly, the latest reading for the second quarter 2017 proved to be disappointing to say the least. Real wage growth plunged significantly below zero both in manufacturing and mining&extraction sectors – a key part of the Norwegian economy. That landscape could look similarly to the UK’s case but a difference is the ex-change rate. In Norway, the NOK is not undervalued, hence there is no inflationary pressures driven by exogenous factors such as heightened import costs. To sump up, as long as real wage growth remains subdued, there could be no a reason to see higher inflation thereby rising rates in Norway.

The rate differential suggests the USDNOK ought to be higher but that relationship might be tricky. Source: Bloomberg

Having looked at the spread of 10Y yields of Norway and the US one could spot that the currency pair looks undervalued. Nonetheless, when we have a look into the past we could notice that the rate differential has tended to converge to the ex-change rate not the other way around. Having said that, even as the USDNOK could march slightly higher on the back of a hawkish stance presented by the Federal Reserve, the upside could be contained barring a surge seen in the US yields.

The USDNOK broke a crucial support zone a few weeks ago which was already tested successfully. Source: xStation5

Taking a look at a weekly time frame one could notice that the pair is trading below its critical resistance area. The price tried to breach that level last week but it failed. That said, as for now it looks that the upside might be limited to 7.99 and without a close above that level on a weekly interval it could be hard to see an extended leg higher despite clues from the bond market. In turn, if the USDNOK resumes its downtrend it may slide even towards 7.30 where a more notable support is located.