Market Economics | Interest Rate Strategy - BNP PARIBAS ...

Norway: Norges Bank Preview
• We continue to expect the Norges Bank to
keep its policy rate on hold at its January
meeting.
Chart 1: Private Consumption & Retail Sales
• Since the December policy decision,
economic data, on average, have been strong,
signalling a pick-up in growth.
• This, together with high house prices and
robust credit growth, is likely to be mentioned in
the policy statement – giving it a hawkish tone.
• However, the appreciation in the NOK is
likely to lead to the Norges Bank remaining
cautious.
Stable policy rate for now
The Norges Bank left its policy rate unchanged for a
fifth consecutive meeting in December. But the
statement accompanying the decision had a hawkish
tone. The Bank’s quarterly rate projections in
October suggested that it intended to deliver a rate
hike, at the earliest, in summer 2011. Although we
believe a hawkish statement in December and recent
strong economic data have increased the chances of
its striking sooner, we expect the Norges Bank to
keep the policy rate at 2.00% at its meeting next
week.
Economic growth picking up
There are increasing signs that economic recovery
has gained momentum in Norway. In line with our
long-held view, an increase in consumer spending is
now evident. The strong retail sales print for
November and consumer confidence in Q4 hitting its
highest level since late 2007 signal that private
consumption remained a key growth driver in Q4.
With interest rates still relatively low, household
consumption also seems to be supported by robust
growth in credit to households.
Another issue, likely to be mentioned by the Norges
Bank, is the increase in house prices. Although
posting slight q/q declines in Q3 and Q4, they are
well above their pre-crisis levels and overall 8.3%
higher last year than in 2009.
Source: Reuters EcoWin Pro
Chart 2: Consumer and Manufacturing
Confidence
Source: Reuters EcoWin Pro
Chart 3: House Prices (Index, Q1 2005 = 100)
Source: Reuters EcoWin Pro
On the production side, although financial and
monetary conditions have tightened recently due to
an appreciation relative to trend in the effective NOK
exchange rate, they are now broadly neutral. Given
lags, however, we should see a further improvement
in production in the period ahead. More forwardlooking
data, such as manufacturing surveys, support
this view. Another positive factor, which should
provide a boost to the economy overall, is the
increase in oil prices.
Gizem Kara 20 January 2011
Market Mover
25
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