Norway’s inflation remains firm as another rate hike looms

Summary:

• Price growth slows less than expected and remains above the central bank’s forecast
• Norges Bank sticks to its view of another rate hike next month
• USDNOK retreats from a key technical level

Norway’s inflation beats central bank forecasts

Headline price growth in Norway remained at 2.9% in annual terms in April, beating the median estimate of a 2.8% increase. Although core inflation ticked down to 2.6% from 2.7%, the fall proved to be lower than expected suggesting that domestic price pressures remain firm there. Moreover, let us remind that the Norwegian central bank changed its inflation target some time ago to 2% from 2.5%, hence headline inflation hovers almost one percentage point above the bank’s objective. What’s more, core inflation, stripping out volatile items like fuels, also has accelerated in recent months calling for higher rates in the Scandinavian economy. Finally our gauge of underlying price growth in Norway, excluding food, tobacco and energy, has also been creeping up of late. This tells us that the latest inflation increase has been mainly domestic-driven and not spurred by exogenous factors.

Price pressure in Norway remained buoyant in the first month of the new quarter. Source: Macrobond, XTB Research

Central bank signals third rate hike

The inflation data came a day after the Norges Bank left interest rates unchanged and underlined the need for the third rate increase as soon as next month. In its brief communique (no new macroeconomic projections were released) the central bank wrote that “the outlook and balance of risks suggested that the policy rate would most likely be raised in the course of the next half-year”. The Norges Bank is in a tough position because it needs to weigh strong economic developments in the country against a set of uncertainties surrounding foreign economies. Nonetheless, it seems that the former will prevail being a convincing signal to continue the monetary tightening cycle. What does it mean for the krone? In short, the Norges Bank is the sole central bank which still considers more tightening irrespective of risks localized mainly abroad. Therefore, we think that the NOK could be a winner within the G10 space during the rest of the year.

Taking a look at the daily USDNOK chart one may notice that the pair has approached the critical supply zone in recent days being steered mainly by the SEK weakness. However, bears seem to be taking control on the market anew and having the US dollar overvalued one may hope for further decreases. From this standpoint another more notable target for sellers is localized at around 8.46. Finally, do notice that the NOK is also supported by Brent oil prices. Source: xStation5