Norges Bank’s Tight Bias Gives Quiet Support to NOK

Key Moments

Policy Shift Driven by Persistent Inflation

Antje Praefcke at Commerzbank notes that Norges Bank decided in September to move up its policy rate increase instead of waiting until December. The central bank’s decision was attributed primarily to inflation that continues to hold above its 2% objective.

According to Praefcke, the bank’s assessment emphasized that price pressures remain stubbornly high, even though other factors – such as a strong krone, which tends to dampen inflation, and corporate expectations for economic activity over the next six months – would have allowed policymakers to delay action until later in the year.

Inflation Metrics and Target Deviation

Praefcke highlights that, on a year-on-year basis for September, headline inflation stands at 3.4%, while core inflation is at 3.0%. Both readings exceed Norges Bank’s stated 2% inflation target, a level that has not been reached since the pandemic period.

“High for Longer” Guidance and Rate Outlook

In Praefcke’s view, Norges Bank’s decision to both accelerate the rate hike and indicate that borrowing costs will remain above previously expected levels for an extended period is a logical response to the inflation backdrop.

She adds that future moves will depend on incoming data over the next several weeks and months. While an additional rate increase is not described as the central scenario, Praefcke underscores that such a step “cannot be ruled out.”

Implications for the Norwegian Krone

Praefcke characterizes the central bank’s communicated stance – maintaining rates at higher levels for longer and keeping the door open to another hike if needed – as subtly supportive for the Norwegian Krone (NOK).

However, she also stresses that, despite this modest policy-related tailwind, NOK’s broader performance continues to be shaped primarily by developments in oil and gas prices.

“It was not a close call for Norges Bank at the end of September to bring forward the policy rate hike rather than wait until December. The reasoning focused on persistently high inflation, since all other factors – including the strong krone, which has a dampening effect on inflation, and businesses’ expectations for economic activity over the next six months – would have made it possible to wait until the end of the year.”

“In fact, inflation stands at 3.4% and core inflation at 3.0% compared to the previous year (September) – with an inflation target of 2% that Norges Bank has failed to meet since the pandemic.”

“In this regard, Norges Bank’s decision to bring forward the rate hike and to signal that the policy rate will now remain elevated for longer than previously anticipated is entirely understandable. Depending on the data in the coming weeks and months, another rate hike cannot be ruled out, though it is not Norges Bank’s main scenario.”

“The “high for longer” stance, along with the signal that rates could be raised again if necessary, is subtly positive for the NOK. In general, however, the currency remains primarily driven by oil and gas prices.”