MNI INTERVIEW: Trade Scenarios Cloud Outlook - Norges Head

Uncertainty around U.S. trade policy is so large that trying to capture its impact in a single scenario would cloud rather than clarify the policy outlook, Norges Bank Governor Ida Wolden Bache told MNI, although she stressed that rate scenarios could be published in future.

Norges Bank has examined multiple scenarios around the impact of tariffs, which can initially push up on inflation but also lower growth and so eventually weigh on prices, but trying to encapsulate their effect in a single scenario portraying an upside or downside risk would be unhelpful, Wolden Bache said in an interview after Norges Bank kept its policy rate at 4.5% on Thursday.

However Norges Bank could yet follow the lead of Sweden’s Riksbank and publish economic scenarios with alternate rate paths to clarify its thinking, she said.

"I think we will use that [scenario analysis] when we believe that that will improve our communication and contribute to clarity about our reaction function and about the outlook,” she said. “Now we have emphasized that the uncertainty about the future trade regime is so large, and we have looked at a host of different scenarios, that we decided not to publish a specific scenario. That could be different going forward."

Norges Bank kept its policy rate unchanged at its March meeting despite having previously said that its first cut of the cycle was likely to come this month. Most analysts had shifted to expecting no change ahead of the meeting, in part following unexpectedly high headline inflation.

"Our reaction pattern is well understood by market participants and … they respond to news in a way that is consistent with our reaction pattern," Wolden Bache said. (See MNI INTERVIEW: Norges' Forecast Rate Shifts Too Predictable)

MEETING-SPECIFIC GUIDANCE

The Monetary Policy and Financial Stability Committee, rather than picking a future meeting as the most probable candidate for a cut, switched to stating that the policy rate would "most likely be reduced in the course of 2025", and said its in-house rate path was compatible with two cuts this year.  Wolden Bache indicated that the Bank could at some point return to signalling policy action at precise meetings.

"I think we can be in that situation at some time in the future where we will go back to doing what we have done previously. Our signal is always consistent with the interest rate projection,” she said, "That is a very precise signal regardless of the fact that it doesn't give the specific timing of any changes in the interest rate.”

Norges Bank’s published rate path does not fully price in two cuts this year, though this is indicated in the statement.

CONSTRUCTION WEAKNESS

One surprise for officials has been the weakness of construction at a time when house prices have risen markedly. But Wolden Bache expects housing supply to pick up and downplayed financial stability risks.

"We have seen strong growth in house prices recently. That comes after a period of quite subdued growth, especially in real terms if you look back over the past few years. ... And we do believe that that uptick in house prices, and we expect around 8% house price growth this year, will contribute to residential investment picking up going forward," she said.

"What we have seen ... over the past few years is that residential investment has fallen significantly. It is an interest-sensitive sector, but … high building costs and other factors have contributed to a sharp decline, and that was sharper than we expected in the previous reports and we revised it downwards," she added.

While the Committee has a dual stability and inflation mandate, she said concerns around the housing market were insufficient to change the rate projection.

"We have seen debt growth picking up slightly, but it has come down significantly from the high ... debt growth we had a few years back and in our forecast the debt-to-income ... will actually decline somewhat," she said.