For months, market participants have debated which developed market (G10) central bank would be the first to raise interest rates. The bias has shifted from Norges Bank to the Reserve Bank of New Zealand (RBNZ) and back again as New Zealand was hit by a cluster of the Delta variant the very day before the central bank was due to commence its hiking cycle. Because of the delay from the RBNZ, we expect the Norges Bank to be the first G10 central bank reaching liftoff on interest rates when it meets on September 23.
During the pandemic, Norges Bank slashed rates from 1.5% to zero and relied on repatriating cash from the country’s sizable sovereign wealth fund to help cover large fiscal deficits.
These actions helped put the Norwegian economy in a good state for some removal of accommodation. Headline inflation is significantly above target while underlying inflation looks to trough at around 1% as the drivers of underlying inflation are firm. The registered unemployment rate now stands at 2.7%, only 0.4 percentage points above the 2019 average. In the most recent regional survey, businesses indicated continued strong hiring intentions while labor market constraints were rather large for this point in the cycle and were a driver of higher wage growth. The business activity gauge (six months ahead) in the survey points to strong growth and is corroborated by the PMI manufacturing and the industrial confidence surveys. As such, we expect the pre-pandemic mainland GDP growth gap to be closed this year or early next year depending on restrictions over the winter months. Helping to boost growth is of course the very strong performance of oil and gas prices, which will serve as a tailwind for quarters to come.
The factors above should point to a slight increase in the published rates path. However, external developments and the judgement factor may temper any increases. In fact, the path accompanying the first hike in the last cycle was revised lower versus the prior meeting.
In terms of market views, we believe that the krone is the best expression on optimism around Norway. It is still undervalued from a long-term fair value perspective while terms-of-trade is strong and the central bank is one of the most hawkish G10 central banks. However, in line with historical patterns, the krone has already rallied into the meeting. Additionally, seasonal factors may soon start to weigh on the currency.