Norges Bank to raise its deposit rate projection path – Nomura

Analysts at Nomura expect Norges Bank to raise its deposit rate projection path at next week’s meeting.

Key Quotes

“Currently, the path implies a full 25bp hike to occur in Q1 2019 – we expect this to shift forward, implying a 25bp hike by Q4 2018 or sooner. Upward revisions to growth forecasts and more long-term inflation forecasts are also likely.”

“Since the last meeting, the Norwegian outlook has continued to improve. The regional network survey confirmed that growth momentum is accelerating; implying mainland growth rates closer to 2.8% y-o-y. This should see Norges Bank’s 2018 GDP forecast, currently 2.3%, revised higher. Investment intentions have also been raised –driven in part by the recovery in the oil industry. The housing market has also showed further signs of stabilising, with house prices in February rising 0.4% m-o-m.”

“January’s inflation print was a disappointment to Norges Bank and consensus forecasts. However, the weakness was not broad based – primarily in clothing. We remain confident that domestic price pressures will continue to recover. January’s print is unlikely to shift the balance on Norges Bank’s outlook. Moreover, clothing prices are volatile, and there are risks that we could see a bounceback in February’s CPI inflation print tomorrow. Cold weather in February may have also aided some recovery.”

“All of the above means we are confident that Norges Bank’s outlook is improving. Upward revisions to the deposit rate path are likely, bringing the first full hike projected in Q4 2018 or earlier. As we have long argued, Norges Bank is highly averse to low interest rates and its wording is likely to shift language towards removing emergency stimulus in the coming meetings – as soon as next week.”

“Entering short EUR/NOK positions looking for a move towards 9.50 or lower

• A hawkish communication next week could further lead the market to raise its expectations for Norges Bank normalisation in 2018 and beyond. We expect this to be a key driver of NOK outperformance in 2018.
• We think current levels are attractive for EUR/NOK shorts, with recent risk aversion driving the cross higher. With the ECB on the sidelines for now, immediate catalysts for EUR appreciation appear more limited, and some recovery in risk appetite can also provide NOK tailwinds. EUR/NOK should drift lower in the medium term as monetary policy divergence and improving terms of trade drive NOK outperformance. We enter via spot positions at 9.6687, looking for a move lower towards 9.45 (setting a stop at 9.85).
• We still maintain a medium-term bullish euro view, and have avoided trading short EUR/NOK so far in 2018 (preferring CAD and SEK shorts instead). If better levels present themselves sometime after next week’s Norges Bank meeting, we may revisit our long NOK exposure to CAD, SEK or USD shorts.”