Norway’s inflation sends NOK higher

Summary:

• Norwegian inflation surprises to the upside for the second month in a row

• Norges Bank gets another confirmation to initiate monetary tightening later this month

• NOK trades higher across the board, EURNOK falls to its key support

The Norwegian central bank has been offered a final confirmation to pull the trigger next month after price growth accelerated more than forecast in August. Note that the last month’s reading came well above the Norges Bank’s estimate suggesting the monetary authority would have to need the quicker pace of rate increases going forward. The krone has jumped immediately after the release being by far the strongest major currency as of 9:00 am BST.

Norway’s price growth jumped last month almost crossing the inflation goal and providing the central bank with another evidence to kick off tightening this month. Source: Macrobond, XTB Research

Consumer price growth increased 3.4% in August in annual terms while the core inflation gauge jumped to 1.9% - both figures easily beat market expectations set at 3.2% and 1.7% respectively. The last month’s data brought the second consecutive positive surprise bringing the Norges Bank closer to begin rising rates this month (the upcoming monetary meeting will be held on 20 September). Note that after the central bank revised the inflation objective to 2% from 2.5% earlier this year it means that underlying price growth in August almost crossed the target. The details showed that food and drinks price growth picked up to 3.2% from 1.3% in July contributing the most to the robust core inflation increase (note that Norwegian core inflation strips out only energy prices and is adjuster for tax changes hence quite volatile food prices tend to affect core inflation growth). On top of that, we were offered a noticeable rise in clothing and footwear where prices jumped 1% YoY last month recovering after making a 2.6% dip in July.

Keep in mind that it may have been another possible factor behind a surprisingly high inflation reading albeit this rise (clothes, footwear) could have been caused, at least in part, by seasonal effects. Besides, the highest rates of annual price growth were seen in housing (6.5%), education (6%), transport (3.8%) and a category embracing hotels, cafes, restaurants (3.3%). Looking ahead core inflation is expected to settle between 1.5% and 2% till the end of the year. However, the central bank may be willing to lift its rate path given the fact that it estimated much slower price growth in its latest monetary policy report. This increase odds that the Norges Bank could suggest next week that the second rate hike may come as soon as December. On the flip side, one needs to take into account that the Norwegian economy is relatively small and hence dependent on what is happening in the Eurozone. Therefore, the Norges Bank may decide to just moderately revise its rate path rather than lifting it sharply and riksing a surge in the NOK in months to come due to a widening rate differential to the shared currency.

The EURNOK seems to be poised to continue falling in the nearest future being fuelled by higher expectations ahead of the next week Norges Bank meeting. Technically bears would take a stab at bringing the pair down toward either the lower bound of the channel or even somewhat lower toward 9.61. From a broader perspective the NOK could be one of the brightest spots among major currencies in the foreseeable future given its undervaluation based on a REER approach. Source: xStation5