Norges Bank lower rates expectations

As widely expected, the Norges Bank left rates unchanged at 2% at the end of last week’s monetary policy meeting. In the Monetary Policy report released after the meeting, the Norges bank indicated that the uncertain outlook on Euro zone economy would postpone the rate hikes previously projected in 2010. Rates are expected to remain unchanged by the time of the publication of Monetary policy report: 3 on October 27th. Rates are also projected to remain on hold by the end of the year versus a previous projection of 2.5%. Key rate is projected to grow to 2.75% by the end of 2011. The new projections clearly indicated that the Norges Bank see the internal economic recovery negatively affected by the European debt crisis. Only in the case the European economy should prove more resilient than expected to the debt crisis the Norges Bank may revise their projections, hiking more aggressively.

Bank of England concerned on inflation

BoE's monetary policy minutes of 9/10 June had a major surprise: one member of the Committee (Andrew Sentance) voted against the decision to maintain rates unchanged at 0.5%, preferring an increase to 0.75%. The reason behind his vote was the higher than expected inflation trend in the last few months. However, according to BoE's minutes, inflation developments concerned the whole of Monetary Policy Committee. The minutes underscored that inflation was higher than expected in the last few months and that may remain above target if the private sector’s expectations of inflation over the medium term also rose. The major risks on inflation outlook were the measures to be announced in the budget and the "considerable uncertainties about the margin of spare capacity and the strength of its influence on inflation". Despite one member's vote in favour of rate hike, we believe that the building of a consensus inside the BoE toward a removal of easing monetary policy is hard to envisage in the short term due to moderate rate of growth. Only in the case the substantial margin of spare capacity would fail to lower inflation in H2 '10 the BoE will start considering raising rates.