MNI NORGES WATCH: On Hold In December, Seen Wary on Cuts

Norges Bank is set to leave its policy rate on hold at 4.0% in December, after Governor Ida Wolden Bache said at the previous meeting that they were "not in a hurry" to reduce rates.

Wolden Bache and her colleagues on Norges Bank's Monetary Policy and Financial Stability Committee stressed last month that policy should remain restrictive as inflation was still too high and although the recent rise has been reversed, the rate cut messaging, alongside Thursday's decision, may well still be cautious.

Policymakers will publish a fresh set of forecasts, with the rate path in the previous, September, quarterly forecast round showing the policy rate declining only very gently to reach 3.3% three years ahead, pointing to a single 25 bps cut per year.

NEUTRAL RATE

The bank's latest estimate of the real neutral rate is 0.25% to 1.5%, suggesting that the current rate is restrictive and that policymakers only expect to get it down to a little below the top of the range, of 3.5% in nominal terms, over three years.

Some analysts expect policy to be eased somewhat faster than the Norwegian central bank has predicted, but it is a moot point whether the rate path will be significantly lowered this month. In November the committee stated that a restrictive monetary policy was still needed. 

R star is, however, not the sole determinant of the degree of restriction, as Norwegian households very largely take out floating rate mortgages, ensuring the cashflow effects are stronger than elsewhere and that the nominal rate level matters (See MNI INTERVIEW: Norges Bank More Restrictive Than Implied By R* )

Recent inflation outturns have been volatile, in part due to food prices, clouding the policy picture. In November the target core inflation measure, CPI-ATE, fell to 3.0% from October's 3.4% and CPI dropped to 3.0% from 3.1%, having peaked at 3.6% in September. 

Concerns over currency weakness, with the krone depreciating 1.4% over the past month on the central bank's I-44 index, may also tilt against any real softening in the policy messaging.