Norges Bank's tough decision

Following the unexpected rate hike by 25bp to 1.75% in December, the outcome of wednesday's Norges Bank monetary policy meeting is highly uncertain. At the end of December’s meeting, the NB said that it did not pencil in another rate increase until the publication of the March Monetary Policy Report (March 24) and announced that the Key policy rate would likely be raised gradually thereafter. Our base scenario is that the Bank will raise rates by 25bp to 2% in March. However, with underlying inflation being higher than expected in the last few months, we are well aware that a rate hike following next week’s monetary policy meeting is a clear possibility. The Norges Bank’s tightening monetary policy is also likely to continue in the months ahead. According to our estimated equilibrium rate model, rates may rise to 2.75% by year end.