Bank of America (BofA) analysts projected that Norges Bank, Norway's central bank, would maintain its key interest rate at 4.50% this week. The decision is based on recent data that leans slightly more hawkish compared to Norges Bank's forecasts.
Despite a dovish surprise in December's core inflation figure, which was 10 basis points below expectations, several factors could exert hawkish pressure. These include a repricing of global rates, particularly in the United States, rising energy prices, a weaker Norwegian Krone (NOK) than anticipated, and robust house prices coupled with a resilient labor market.
BofA anticipates that Norges Bank will signal a potential rate cut in March but will use cautious language to prevent any dovish interpretations that might undermine the NOK. While a new rates path is not expected to be released, the monetary policy assessment is likely to highlight some hawkish risks.
The Committee has shown a more nuanced view on inflation prospects and policy trade-offs, softening their previously hawkish stance on the inflation outlook in December. They made a significant revision to core inflation forecasts and acknowledged shortcomings in the central bank's models to predict disinflation trends.
With current rates well above the bank's estimates of neutral (1.7-2.7% nominal), BofA remains convinced that a gradual cycle of rate reductions is on the horizon, starting with a 25 basis point cut in March. Although the base case predicts four cuts throughout the year, there is a growing possibility that it could be limited to three, particularly if the Federal Reserve's easing expectations stay subdued.
In terms of currency impact, BofA expects minimal immediate effects from the upcoming Norges Bank meeting, viewing it largely as an interim event. However, they suggest that the recent upward repricing of Norges Bank's terminal rate may have been excessive, especially when compared to the European Central Bank, given the relatively stable FX conditions. BofA maintains a bearish stance on the NOK for the time being.
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