mercoledì 23 settembre 2009

Norges Bank drives Norwegian Krone outlook

As widely expected, the Norges Bank decided to leave the key policy rate unchanged at 1.25% at today’s monetary policy meeting. Nevertheless, in the statement released after the meeting, the Central Bank announced that the Executive Board had considered the alternative of increasing the key policy rate.

The Bank highlighted that activity in the global economy and Norway’s economic growth had been stronger than initially projected in the Monetary Policy Report 2/2009 (published on 17 June). Core inflation now stands at around 2.5% in spite of the appreciation of the Norwegian Krone and above-estimate but still poor economic growth. With international financial markets recovering some ground and Norwegian house prices nearing to the 2007 historical high, the Norges Bank will likely begin removing its ultra-expansionary monetary policy in the short term. Following today’s monetary policy assessment, it is highly likely that the Central Bank will raise rates at the October 28 Monetary Policy Meeting, with a 50bp rate hike as a clear possibility. The Monetary Policy Report due for publication the same day will provide further hints about the prospects for the monetary policy.

An increase in the interest rate will therefore result in Krone appreciation in the medium term. With both the Fed and the ECB likely to hold the key policy rate steady for some months, the interest rate differential will become more favourable to the Norwegian Krone going forward. The country’s economic activity is also likely to improve sharply due to the fiscal stimulus that is being implemented. The productivity differential against the Eurozone will therefore widen. The Norwegian Krone would be a strong buy should oil prices resume an upward trend.

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