Interest Rate Meeting Thursday: The Battle is Between Raising Now or in June

Norway's central bank, Norges Bank, stands at a critical juncture as it prepares to announce its latest interest rate decision this Thursday. The market is finely balanced, with a 50/50 probability assigned to a rate hike at the upcoming meeting, reflecting deep uncertainty about the path forward. This comes after a significant pivot by the central bank, which has shifted its stance from anticipating rate cuts earlier in the year to now contemplating further increases due to persistent high inflation.

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This is on the tipping point, so the market assesses it.

Chief economist Marius Gonsholt Hov at Handelsbanken notes that the decision is "on the tipping point," with a strong likelihood of a rate increase to 4.25 percent from the current 4 percent. He emphasizes that the "battle is between a hike now or in June," but the direction is clear: rates are headed up. This adjustment in outlook is driven by recent inflation figures that have proven more stubborn than anticipated, particularly concerning domestic price growth, which Hov estimates at around 3.5 percent, well above Norges Bank's 2 percent target. The ongoing conflict in the Middle East and rising energy prices have only exacerbated these inflationary pressures.

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The battle is between a hike now next week or if they take it in June. But it is quite clear that the rate is going up.

However, economists at Nordea Markets, Kjetil Olsen and Sara Midtgaard, present a nuanced view, suggesting that while a May hike is plausible, waiting until June might be the more prudent choice. They point to the strengthening Norwegian krone, which has appreciated significantly against major currencies like the euro and the dollar since the start of the year. This stronger krone could help dampen inflation by making imported goods cheaper. While acknowledging the inflationary pressures from global events, Nordea's economists believe that recent inflation data and the wage settlement align with Norges Bank's expectations, potentially giving them room to hold rates steady for now and signal a June increase. The debate highlights the complex trade-offs Norges Bank faces in balancing domestic inflation concerns with external economic factors and currency movements.

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We think they choose to keep the rate unchanged now, but give a clear signal about a rate hike in June. Nevertheless, we are uncertain.