NORGES BANK: Rate Path Leans Against Q1 Move, Smaller than Expected Changes
We now have access to the full Norges Bank projections(!). Rate path revised down by at most 5bps (in June 2027) – smaller than analyst expectations we had seen.
- The Q1 ’26 point is unchanged at 4.00%, suggesting no (if not a very small) probability of a cut in March.
- The Q2 ’26 point is also unchanged at 3.92% - suggests if there is a Q2 cut it is skewed towards June. We had seen analyst point estimates of 3.87% (Nordea) and 3.91% (JP Morgan).
- Q4 ’26 point revised down 3bps to 3.71%. Our back of the envelope calculation suggests this leans in favour of 2 cuts (rather than 1), though the policy statement guidance doesn’t make that distinction.
Reviewing the main macro forecasts:
- CPI-ATE inflation has been revised lower through 2026, but higher further out the curve. The MPR notes that “The wage growth projections have been revised up somewhat for 2025, and productivity growth has been somewhat lower than expected in the September report”. The weaker-than-expected exchange rate also pushes up inflation through the forecast horizon.
- 2025 wage growth has been revised up 2 tenths to 4.9%, while the 2026 forecast is unchanged at 4.2%.
- The output gap is more negative through the projection horizon. We had wondered whether Norges Bank would make significant revisions to its potential output estimates, but these look to be modest relative to September: “
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STIR: Citi Recommend SFIH6/Z6 Flattener
Citi have recommended entering a SFIH6/Z6 flattener at -17.0bp, targeting a move to -50.0, with a stop set at 0bp.
- They view the BoE easing cycle as “likely having 3 phases. The first was the regular quarterly rhythm for the first 5 cuts. The second - which is the current - is a risk management phase of slower, irregular cuts awaiting more evidence that disinflation is on track. The third, we suspect, will be cuts to a lower terminal rate than priced, informed by lacklustre growth (impeded by a long list of small tax hikes and ongoing political/fiscal uncertainty), with mounting evidence of growing slack in the labour market, and with CPI realizing close to target later in 2026”.
- They believe that the second/current phase is “fairly priced”, and the “potential third phase that offers the best risk-reward”.
Fig. 1: SONIA Mar '26/Dec '26 Spread (SFIH6/Z6 Spread)
Source: MNI - Market News/Bloomberg Finance L.P.
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FRANCE: OATs Widening Alongside Peers, But Domestic Political Risks Increasing
The 10-year OAT/Bund spread is back at 75bps, 1bp wider on the day alongside EGB peers. While continued weakness in equity benchmarks looks to be the main driver of recent EGB spread widening, domestic political developments remain a risk to monitor.
- This morning, Le Parisien reported that members of the centre and right “agreed” that they would note vote in favour of the revenue section of the 2026 budget, if it were to be put to a vote in its current form. Link here
- Sources suggest this would be “due to the insincerity of some of the measures adopted”.
- However, the report does not contain information on whether ministers would abstain from a vote, or vote against the motion.
- Ultimately, it underscores the difficult balancing act PM Lecornu is facing. Amendments to the budget to date have already pushed the expected 2026 deficit towards (or above) 5%, versus a target of 4.7%.
- Meanwhile, the Senate starts reviewing the Social Security section of the budget tomorrow. Actions around the 2023 pension reform suspension are in focus.
