Norges Bank keeps September hike alive after holding at 4.25%
The Norges Bank left its policy rate unchanged at 4.25%, as we expected, after two consecutive downside surprises in underlying inflation removed the case for an immediate hike.
But this was not a dovish hold. Governor Ida Wolden Bache stressed that inflation remains too high and that another rate increase may still be needed. We continue to see a September hike as a likely option rather than a certainty, with incoming inflation, wage data, and fresh forecasts now key.
CPI-ATE, the Norges Bank’s preferred measure of underlying inflation, remained at 2.7% YoY in July, below the 2.9% consensus and the Bank’s own 3.3% projection.
This followed an equally soft 2.7% reading in June, leaving core inflation 0.6pp below the path assumed when the Norges Bank signalled that another hike would likely be needed at one of the forthcoming meetings. Granted, headline CPI has accelerated to 3.0% YoY, but higher electricity costs accounted for much of the increase, limiting hawkish implications.
Still, Bache stressed that the main underlying drivers remain broadly in line with the June assumptions: external price pressures, oil, NOK and the labour market have evolved largely as expected, while wage and business-cost pressures remain elevated.
At the same time, the Norges Bank’s SMART model now points to lower inflation ahead, capacity utilisation is drifting lower, construction activity remains weak, and house prices fell markedly in July. Together, these developments argue against tightening more than necessary.
That leaves September data-dependent. Bache declined to strengthen the guidance during the press conference and confirmed that incoming price and wage growth data will be important for the next decision, when the Norges Bank will publish new forecasts. In our view, a rebound in CPI-ATE alongside firm wage growth would favour one final 25bp hike to 4.50%.
Another soft-core print would strengthen the case that 4.25% is already sufficiently restrictive.
For NOK, today’s hold itself should have limited impact. More importantly, the Bank has kept another hike firmly in play. That should limit downside risks for the krone, while renewed evidence of persistent inflation could rebuild expectations for September and provide fresh NOK support if realised.