The message from Norges Bank has been just as volatile as the import-weighted NOK index over the past year with hawkish and dovish comments swiftly changing. In our view, Norges Bank is balancing between high resource utilisation and low inflation. Surely one could add strong household credit growth to the equation but as macro prudential measures have been initiated and partly implemented the bank has tools besides the interest rate to tackle it. Economic data since the March MPR doesn’t suggest the balance to be shifted from inflation (unchanged rates) to growth-oriented monetary policy (hike). The key rate is thus widely expected to be held unchanged at 1.50% but the revision of the rate path is far more uncertain. We expect Norges Bank to reduce the probability for a rate cut (if not completely) while revising the longer rate outlook lower by some 25-40bps, resulting in a flatter rate path. Market discounts a 15-20% probability for a rate cut but an unchanged rates at the June decision shouldn’t have any material impact on short rates. Considering that currencies remain in the hands of central banks the possible effect on NOK could be greater.
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