• Norges Bank will not change rates
• NOK has weakened significantly, but on the other hand inflation and some other domestic figures have been on the weak side
• No significant change in view
No change in rates
Norges Bank will publish its interest rate decision on 24 October at 10:00 CET. It will not present a new interest rate forecast. We are in line with 13 of 14 analysts asked by Reuters in believing in unchanged rates (one forecast a cut). All eyes will be on signals of whether Norges Bank has changed its view on interest rates looking ahead. In the September interest rate path Norges Bank forecasted unchanged rates until a first hike in Q2 or Q3 2014.
Mixed news
News since the September report is mixed. One factor points to higher interest rates:
• NOK has weakened since the September report and is approximately 3% weaker than Norges Bank’s forecast for Q4. Judging by the two latest monetary policy reports that should lift the interest rate forecast by 30bp after some quarters. Apart from this financial conditions have been about as expected.
Weaker NOK
There are however some factors pointing to lower rates:
• Core inflation fell from 2.5% in August to 1.7% in September. That was 0.5% points below Norges Bank. Judging by the two latest monetary policy reports (June and September) such a gap should lower the interest rate forecast by 20bp after some quarters. But remember Norges Bank reaction to higher inflation in both the two reports was muted compared to its normal reaction function.
• Retail sales were rather weak again in August (0.2% m/m) and so far in Q3 retail sales are down -0,9% q/q. Norges Bank has a very moderate forecast for private consumption in the second half of 2013, but still the figure was probably somewhat on the downside.
• Norges Bank favourite measure for unemployment (registered excl. those on labour market measures) increased by 1 100 persons in September. The level is still not higher than its 2013 forecast implies, but its 2014 forecast will be too low if unemployment continues to increase at this speed.
• House prices fell nearly 1% in September and there is a lot of anecdotal evidence pointing to a significant weakening of the housing market. All else a weaker housing points to lower rates, but is uncertain how strong the effect is. Lower house prices will weaken growth and capacity utilization. Add to this that lower house prices could ease the fear of financial instability. We however believe Norges Bank would not do too much out of somewhat weaker housing market. It would probably like a moderate, controlled softening of the housing market since house price levels and debt levels are too high.
No significant change in view
There is not much more than a month since Norges Bank made its last interest rate forecast. It will probably not draw any strong conclusions on the rather few key figures received since then. It will most likely conclude that NOK has been on the weak side, but on the other hand figures for inflation/growth/capacity utilization have also been slightly weaker than expected. It will by that indicate that is has not changed view on interest rates significantly. That is probably also what the market expects from Norges Bnak so no strong market reaction is expected.
Nordea