NorgesBank Meeting

Norges Bank held the policy rate at 4.25% as unanimously expected, and softened its guidance for future tightening.

Norges Bank left its policy rate on hold at 4.25% in August, responding to the recent marked inflation undershoot relative to its forecast, whilts also altering its guidance to leave the question hanging whether a hike will prove to be necessary. At the June meeting, when the Norwegian central bank had competed a quarterly forecast round, its own rate path fully priced in a Q3 hike and it stated that "it will likely be necessary to raise the policy rate further at one of the forthcoming monetary policy meetings".However, the new August guidance was less explicit. After noting the inflation undershoot the bank's policy committee by 0.6 percentage point in the latest release it simply stated that as it was too early to conclude if the outlook had changed materially and "It may thus still become necessary to raise the policy rate." Governor Ida Wolden Bache cited the undershoot in imported inflation as one area that the bank would look at again in the September forecast round, with the extent and speed of the passthrough all factors that need considering. The krone, which can move sharply in line with oil price news, is always a wildcard for the central bank which relies on a constant projection for the krone on an imported weighted basis. "Imported inflation increased quite markedly earlier in the year. It has come down, it has been lower than expected, and then naturally you look at so the underlying drivers," Wolden Bache told MNI in an interview following the latest policy decision (See MNI INTERVIEW: FX Impact Eyed As Inflation Misses- Norges Head: https://www.mnimarkets.com/articles/mni-interview-fx-impact-eyed-as-inflation-m isses-norges-head-1786627405594 ) OPTIONS OPEN Following the announcement and the new guidance analysts' quick responses highlighted the uncertainty over whether a hike would now materialize, with Norges Bank perceived to be leaving its options open. In the published policy discussion accompanying the August decision committee members signalled that a downward revision to the near-term inflation outlook looks more than likely in the September forecast round. That Norges Bank's using the in-house real time forecast, which weighted from a set of models, "the inflation forecasts for the coming quarters have been revised down since June." Softer food prices, some weakness in service prices and lower imported inflation all point to a less marked overshoot of the 2% target than previously assumed. Wolden Bache was at pains to stress that a rate hike remained on the table but the certainty around it has clearly diminished.