EUR/NOK: Norges Bank hikes imminent, supporting krone outlook – CIBC

Last month, economists at CIBC underlined that the Norwegian krone was a laggard amidst crowded positioning and data disappointments, including a material miss in Q1 GDP. However, despite the slow start to the year, they anticipated that the easing in lockdown restrictions would encourage a substantive rebound from Q2 onwards, and see the Norges Bank accelerate their tightening bias as a result – supporting the NOK. 

Norges Bank to reverse policy easing as economic normalisation on the horizon

“The recent central bank policy update underlined that the easing of policy restrictions would result in the economy reaching pre-pandemic levels by the end of July. But May’s mainland GDP advance of 1.8%, more than twice the central bank’s expectation, suggests that the economy is already operating at pre-pandemic levels.” 

“In view of the economy having reached such levels, we expect the Norges Bank to follow through by hiking in September. That would make it a leader amongst global central banks, despite the Norges Bank recently revising down its inflation profile. The bank assumes that NOK gains and moderate wage growth will preclude a substantive inflation pick up.” 

“A faster than expected 2022 growth trajectory, (the central bank now assumes a 4.1% gain compared with 3.4% in Q1), underlines policy activism. We expect a 25bp hike in September and a further 25bp hike in each subsequent quarter until the middle of next year. We also expect the economy to benefit from elevated oil prices.” 

“With a degree of fiscal pump priming also likely to be unveiled ahead of the September 13 election, the combination of faster growth, monetary tightening, and fiscal easing points towards a positive NOK bias in H2.”