Summary:

• Norges Bank leaves interest rates unchanged as expected, the path of future hikes revised slightly up
• Inflation seen somewhat higher, output gap somewhat narrower than in September
• NOK surges 1% against the greenback being the best currency in G10

Thursday abounds in many decisions coming from central banks. An avalanche was begun by the Federal Reserve on Wednesday in turn today decisions from SNB, Norges Bank and CBRT were already released. Looking forward there will be also statements from BoE and of course ECB. Taking a closer look into the statement of the Norges Bank one may notice that a jump seen in the Norwegian krone seems to be entirely justified.

The interest rate hikes path was lifted to some extent pushing the NOK higher. Source: Norges Bank

Although the bank did not change rates as it was broadly forecast it chose to lift the projected path of interest rate hikes along the curve. Hence now the monetary authorities expect the main rate to be at 0.62% in Q4 2018 (vs. 0.58% previously) and at 0.74% in Q1 2019 (0.62% earlier) foreshadowing that rates could increase gradually after autumn 2018. In the monetary statement one can read that “on the whole, the changes in the outlook and the balance of risks imply a somewhat earlier increase in the key policy rate than projected in the September report”. The bank also added that growth in the Norwegian economy has clearly firmed since autumn 2016 on the back of low interest rates, improved competitiveness and an expansionary fiscal stance.

Core inflation is seen higher compared to the September projections but the price target remains elusive in the projections window. Source: Norges Bank

Furthermore one needs to underline that according to the Scandinavian central bank companies should increase their investment over the next 12 months which could buoy economic growth. At the same time the bank referred to the shrinking output gap which, however stems predominantly from slightly reduced potential output rather than quicker pace of GDP growth. Looking ahead lower unemployment in conjunction with the higher pace of jobs creation than projected in September could boost economic growth whereas labour market developments over the past few months indicate that there is less slack than envisaged a quarter ago. Putting all the above-mentioned together the Norges Bank predicts GDP growth to be higher than potential output growth in the years ahead and therefore spare capacity in the economy should be vanishing.

The EURNOK slumped following the Norges Bank statement as time for the first rate hike was set a bit earlier than earlier. Source: xStation5

Notice that quite a remarkable response to the central bank decision could be an effect of the latest sell-off fuelled by the housing market concerns. Weighing a slightly hawkish stance presented by the Norway’s central bank against the overbought euro one may assume that the EURNOK could continue falling. Technically a more important support could be found at around 9.6160 and once bears manage to break through this line, it could give a rise to a pullback at least toward 9.40. At last let’s add that the bond market appears to also act in favour of NOK bulls.