Hawkish surprise from Norge's Bank - ING

The Norwegian central bank delivered a hawkish surprise this morning, according to Jonas Goltermann, Economist at ING. While rates were left unchanged at 0.5%, the NB's interest rate forecast shifted forward significantly and the policy statement was more upbeat on prospects for the Norwegian economy, he further explains.

Key Quotes

“Norge's Bank kept interest rates unchanged at 0.5%, as expected, but shifted its forecast for interest rates forward more than anticipated. The forecast now shows the expected interest rate at and 0.62% in 2018Q4 and 0.74% in 2019Q1, implying a 50-50 chance of a rate hike by the end of next year. The previous forecast didn't anticipate the first hike until 2017Q3. The press release also stated that rates would 'remain at 0.5 percent in the period to autumn 2018, followed by a gradual increase', materially more hawkish than previous language.”

“Projections for inflation were revised up materially on the back of higher oil prices and a weaker NOK. More importantly, it also revised up its forecast for the output gap due to a tighter labour market. The NB now sees the output gap closing in 2019Q1 vs 2019Q3 in the September forecast. And the assessment of the housing market continues to be very sanguine, with the NB expecting a soft landing (whereas the market seems to have priced in significant downside risk to the housing market).”

“With NOK being ultra-cheap (underlined by its disconnect from the oil price over the past months) being undervalued by 3.7% and 12% on short-term and medium term basis, plenty of bad news already priced into the currency (e.g. the housing market concerns), the non-negligible shift in the Norges Bank forward rate guidance should stabilize NOK and lead to further near-term gains. We target EUR/NOK 9.65 in coming days. This is in line with our 2018 FX Outlook: Happy Hour!, where we expressed the view of overdone NOK weakness, targeting EUR/NOK 9.40 levels by the end 2018.”

“Today’s NB decision is also very good news for SEK, with EUR/SEK feeling the positive spill-over effect from higher NOK. With the Stibor interbank rates expected to normalize in very early 2018 (once the year-end resolution fund induced dislocations disappear), EUR/SEK should move closer to 9.60 in 1Q18. Short EUR/SEK via 2-m put spread (targeting 9.60) is one of our top trades for 2018.”