norges bank review 23 june 2016€¦ · tempo is little changed from the march mpr. •overall,...

Investment Research

www.danskebank.com/CI Important disclosures and certifications are contained from page 9 of this report.

Norges Bank Review‘Unchanged’ but September cut still in storeFrank Jullum

Chief Economist

+47 85 40 65 40

[email protected]

www.danskebank.com/research

Kristoffer Kjær Lomholt

Analyst

+45 45 12 85 29

[email protected]

Follow us on Twitter @Danske_Research

23 June 2016

2www.danskebank.com/CI

Main points

• As expected, Norges Bank (NB) this morning left the sight deposit rate unchanged at 0.50%.

• The revised rate path still has a 100% implied probability of a 25bp rate cut in H2 16. As NB only publishes the rate path with two decimals, we have a 70-100% implied probability of the cut coming at the next meeting in September. The implied probability for zero rates in Norway was cut from 20% in March to 0% in today’s Monetary Policy Report.

• Market reaction. Prior to the decision, markets had priced in around a 10% probability of a rate cut today. Post the decision, short-term rates have risen slightly but markets still price in close to a full rate cut on a 12M horizon. EUR/NOK has fallen moderately as expected.

• Our expectation. Overall, the rate path was marginally more hawkish than we expected, as we believed NB would keep a small (5-10%) probability of a cut to 0%. Overall, we think today’s decision supports our call that NB will cut the sight deposit rate by 25bp to 0.25% in September and that this will mark the final cut in this cycle.

• FX. The short-term NOK outlook will be closely tied to the result of the UK’s EU referendum. In our view, a ‘Brexit’ would send EUR/NOK higher by 20-25 figures while a ‘Bremain’ would lower the cross to 9.20-30. Irrespective of the vote, we think the NOK upside potential will remain the largest on a 6-12M horizon.


‘Unchanged’ and marginal upward revision to rate path

New rate path still has a guaranteed rate cut in H2

2016 but no longer a probability of an additional cut

Source: Norges Bank, Danske Bank Markets

Markets price in close to a full rate cut on a 12M

horizon

Source: Danske Bank Markets

• Today, Norges Bank decided to leave the sight deposit

rate unchanged at 0.50%. This was in line with

expectations.

• In the corresponding Monetary Policy Report (MPR), the

revised rate path has a 100% implied probability of a 25bp rate cut in H2 16. As NB only publishes the rate path with two decimals we have a 70-100% implied probability of the cut coming at the next meeting in September. The implied probability for zero rates in Norway was cut from 20% in March to 0% in today’s Monetary Policy Report.

• Overall, the rate path was a bit higher than our

expectations, due to a revision to the estimated trend growth, which increases the output gap despite the downward adjustment of growth rates. This explains the lack of downward adjustment of the rate path from mid-2017 and throughout 2019.

• We still expect NB to cut rates by 25bp at the

September meeting. However, on balance the

probability has fallen somewhat on the back of the

latest change in the risk outlook for the economy.


Rate path lift driven by domestic demand

Arguments

• Norges Bank has revised the estimated trend growth, which increases the outputgapdespite lower growth estimates. More expansive fiscal policy is pulling the rate path upwards as well.

• As the central wage negotiations came out lower than expected, wage growth has been adjusted downwards and is pushing the path down.

• Higher money market spreads (versus the folio) add some basis points on the downside.

• Foreign forward rates have dropped, pushing the rate path downwards, but especially from late 2017 and throughout 2019.

• The stronger NOK is pushing the path downwards but is mainly explained by higher oil prices.

Contributing factors behind the higher rate path...


WagesPublic

demand

Private

demand

Foreign

interest

Lending

margins

Exchange

rate

Sum

30/09/2016 -0.07 0.03 0.14 0.00 -0.01 -0.02 0.0731/12/2016 -0.12 0.05 0.20 -0.01 -0.01 -0.09 0.0231/03/2017 -0.17 0.06 0.33 -0.03 -0.02 -0.12 0.0530/06/2017 -0.17 0.06 0.37 -0.04 -0.02 -0.14 0.0630/09/2017 -0.16 0.07 0.39 -0.06 -0.02 -0.15 0.0731/12/2017 -0.15 0.06 0.40 -0.07 -0.02 -0.15 0.0731/03/2018 -0.14 0.06 0.42 -0.09 -0.02 -0.15 0.0830/06/2018 -0.12 0.05 0.41 -0.10 -0.02 -0.14 0.0830/09/2018 -0.11 0.04 0.39 -0.10 -0.02 -0.14 0.0631/12/2018 -0.09 0.03 0.38 -0.11 -0.02 -0.13 0.0631/03/2019 -0.08 0.03 0.37 -0.11 -0.02 -0.12 0.0730/06/2019 -0.07 0.02 0.36 -0.12 -0.02 -0.11 0.0630/09/2019 -0.05 0.02 0.36 -0.12 -0.02 -0.10 0.0931/12/2019 -0.04 0.02 0.35 -0.12 -0.02 -0.08 0.11

-0.50

-0.40

-0.30

-0.20

-0.10

0.00

0.10

0.20

0.30

0.40

0.50

0.60

PPFactors behind changes to the rate path

Exchange rate Lending marginsForeign interest rates Private demandPublic demand WagesSum


Growth forecast lowered

Growth forecast cut more than expected

• Mainland growth was adjusted downward by 0.2pp for 2017-19.

• However, the main factor behind the adjustment is a revision of the expected trend growth in the mainland economy.

• Actually, the output gap is adjusted upwards by 0.1pp in 2016 and 2017.

• The unemployment rate is adjusted marginally lower, as actual unemployment rates have surprised on the downside.

GDP forecasts lowered

.... but minor changes to the oil investment

forecasts

Source: Norges Bank, Macrobond Financial, Danske Bank Markets

Source: Norges Bank, Macrobond Financial, Danske Bank Markets


Inflation forecast lowered

Wage growth lowered and stronger NOK

• Norges Bank cut its core inflation projections by 0.1pp for 2016 and 0.2pp for 2017.

• Wage growth has been lowered by 0.1pp for 2016 and 2017, and 0.2pp for 2018.

• In addition, the stronger starting point for the import-weighted NOK results in a roughly 2-2.5% stronger NOK compared with the March report.

Source: Macrobond Financial, Danske Bank Markets

Inflation projections lowered slightly


…partly due to lower wage growth


Norges Bank lifts I44 NOK forecast profile (weaker NOK)

‘Weak for longer’

• As expected, Norges Bank lowered its forecast for the import weighted NOK index (i.e. it has shifted the NOK profile to a stronger level). As the chart on the right shows, this is the first time in many years.

• In the MPR, Norges Bank argued that “the upswing in oil

prices and a slight increase in the interest rate

differential against other countries have contributed to

an appreciation of the krone exchange rate measured by

the import-weighted exchange rate index (I-44). Higher

oil prices may have reduced market uncertainty

regarding growth prospects for the Norwegian economy

and contributed to a reduction of the risk premium for

NOK. So far in Q2, the krone exchange rate has on

average been 2.4% stronger than projected in the

March Report.”

• The revised I44 projection still implies only a gradually

stronger NOK in the coming years. The appreciation

tempo is little changed from the March MPR.

• Overall, this is in line with our own view (see overleaf).* The I44 is the NOK index that Norges Bank forecasts and currently the EUR (34%), SEK

(13%), CNY (10%), GBP (7%), DKK (6%) and USD (6%) make up the majority of the index.

Source: Macrobond Financial, Danske Bank Markets

Norges Bank relifts the I44 forecast...

...and expects range trading in coming quarters


FX implications for EUR/NOK

Initial reaction

• As expected, EUR/NOK moderately dropped on the rate announcement and the MPR release (see margin chart).

• The short-term NOK outlook will be closely tied to the result of the EU UK referendum. In our view a ‘Brexit’ would send EUR/NOK

higher by 20-25 figures.

EUR/NOK outlook under our ‘Bremain’ base case scenario

• Tomorrow. We expect risk relief and the growth tail-risk removal of Norway’s closest trading partners to send the Brent crude oil price towards USD52/bbl. According to our short-term financial models, this should return EUR/NOK to the 9.20-9-30 range.

• 1-6M. A ‘Bremain’ does not alter our view that – while the NOK seems fundamentally undervalued from a long run perspective – the deterioration in Norwegian competitiveness over the past decades limits the short-term NOK-upside potential. We expect Norges Bank to cut rates for the final time in September (not fully priced in) and private sector growth to remain vulnerable to a significant NOK appreciation. We forecast EUR/NOK at 9.30 in 3M and 9.20 in 6M.

• 6-12M: We expect an economic recovery in Norway towards trend growth in 2017, a gradually higher oil price, a repricing of monetary policy post the final September cut and general valuation to send EUR/NOK lower towards 8.90 in 12M.

Source: Bloomberg, Macrobond Financial, Danske Bank Markets

EUR/NOK somewhat lower as expected

The NOK is no longer a safe-haven currency

Source: Bloomberg, Macrobond Financial, Danske Bank Markets


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norges bank review 23 june 2016€¦ · tempo is little changed from the march mpr. •overall,...

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