A hawkish Norges Bank hold can cushion a gradual retreat
The Norges Bank kept its policy rate at 4.50%, matching unanimous consensus, while retaining the option of further tightening if inflation warrants it.
A hawkish tilt to the guidance should offer some support for the krone, but as we see it, offers little new impetus after its substantial outperformance. An escalation or further prolongation of the US-Iran conflict remains the main risk to that view, potentially renewing support through higher energy prices.
Having reversed last year’s 50bp of easing with increases in May and September, the Norges Bank is now assessing whether the current policy setting is sufficient.
The Committee saw no material change in the economic outlook since September, while capacity utilisation remains slightly below normal. However, registered unemployment has been lower than projected, and employment has increased somewhat more than expected. That combination supports an extended hold while leaving another hike possible, rather than establishing a clear need for further tightening. Updated forecasts on December 17th will provide the next assessment of that balance.
For now, though, the Bank's caution looks reasonable. September’s headline and underlying inflation stood at 3.4% and 3.0% YoY, respectively, broadly matching projections, but domestically produced goods and services inflation exceeded expectations.
External pressures also remain uncomfortable: oil spot prices have fallen, yet oil futures have increased somewhat, alongside higher gas and electricity prices. A stronger-than-projected krone helps restrain imported inflation, reducing the need for additional rate increases, but has not removed concerns that earlier rises in business costs will keep domestic inflation elevated.
All told, we think this mix implies a gradual retreat from the krone’s recent strength, albeit with restrictive monetary policy helping cushion NOK downside.
Indeed, the krone's recent appreciation scans as hard to sustain absent tighter policy or higher oil prices, even with a hawkish skew in the Bank's updated guidance. The main challenge to our view remains the risk of higher energy costs, which, given ongoing US-Iran hostilities, leaves NOK risks asymmetrically tilted to the upside relative to our baseline.
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