MNI NORGES WATCH: On Cusp Of Tightening, Timing Unclear

Rates markets are partially pricing in a 25-basis-point hike by Norway’s central bank on Thursday, and analysts are divided over whether the increase in rates flagged by Governor Ida Wolden Bache will come this week or be delayed until the June meeting.

Unlike other central banks worried by stagflationary forces generated by the energy shock, Norges Bank is largely free to concentrate on the price impact of the Iran war, as higher oil prices will boost its offshore economy. Inflation on the CPI-ATE measure was already above target when the conflict started, and on the latest reading was marginally above 3.0% on the year, while services inflation has proved sticky.

"We really do believe that there's a need for a more restrictive monetary policy," Wolden Bache told MNI interview following the March decision. Policy guidance stated that it was likely to be necessary "to raise the policy rate at one of the forthcoming monetary policy meetings.”

On April 15, Wolden Bache stuck by her hawkish message, saying in an interview with NRK that she was aware that high interest rates are not popular but that recent data indicated inflation would remain high and "we have to react."

The March rate path pointed to between one and two 25bp hikes this year, but the central bank's shift away from meeting-specific guidance has left market participants guessing over the timing. (See MNI INTERVIEW: Norges Bank Head Tilts Against Precise Guidance)

Krone strength should squeeze down on imported inflation, with Norges Bank's I-44 index dropping to 110.11 on May 5 from 113.41 at the time when the March decision was announced. (a lower number indicates an appreciation) It is unclear, however, whether the currency's rebound would be maintained if the central bank did not follow through on tightening. It is also positively correlated with highly volatile oil prices.

No new forecasts will be published at the May meeting, and one argument for delay could be to wait until a new set of economic projections have been completed and there is greater clarity on the direction of the Iran conflict.

Some analysts argue for a postponed hike and a clear steer to June. It would be tricky, however, for Wolden Bache to both make the case for waiting for more information and to indicate a hike is coming next month without appearing inconsistent.