MNI NORGES WATCH: Previously Clear March Cut In The Balance

Norges Bank had clearly signalled that it intends to finally cut its policy rate this week after holding it at 4.5% since December 2023, but a jump in inflation has raised doubts among analysts with several now predicting no change.

Opting for a pause would however provide Governor Ida Wolden Back with a tricky communications challenge.

If the central bank simply pushes back the likely timing of its first rate cut, by, say, a quarter, it would risk losing credibility, with markets potentially doubting the new timing. Another approach might be for it to proceed with a cut while nudging up its rate path if it is concerned about the recent price data.

Its December rate projection showed the policy rate falling from 4.5% to 4.1% this year and to 3.0% three years out. The central bank could tilt the scales away from a second cut in 2025 and leave the terminal rate a touch higher.

In the past Norges Bank has tended to move its forecast in a predictable direction, reflecting its preference for rate smoothing, though this time it may choose to shift up its rate projection. (See MNI INTERVIEW: Norges' Forecast Rate Shifts Too Predictable )

In January the policy committee restated guidance that “the policy rate will likely be reduced in March.” With other advanced economy central banks all having progressed in their easing cycles and with Norges Bank's rate well above its estimates of neutral, a cut seemed in the bag until data surprised to the upside.

DATA SURPRISES

The central bank’s previous full set of forecasts in its December Monetary Policy Report had anticipated inflation on the core CPI-ATE target measure, which excludes tax and energy, at 2.6% on the year in January and 2.7% in February. Instead it came in at 3.4% and 2.8% respectively.

Norges Bank's business survey pointed to a strengthening of the real economy. Contacts reported a pick-up in growth in Q1 and predicted stable output in Q2 thanks to Increased defence investment and high maritime orders.

In response, the Norwegian krone has strengthened, appreciating by 4.7% after an extended period during which it underperformed central bank projections. The currency moved to 117.82 on Norges Bank’s trade weighted I-44 index, from its December high of 123.63, with a lower reading indicating appreciation.