MARKET MOVER - BNP PARIBAS - Investment Services India

Norway: Cautious Approach
Chart 1: Policy Rates (%)
• The Norges Bank kept its policy rate at
2.00% at its September meeting, in line with
market expectations.
• The statement accompanying the decision
had a slightly dovish tone compared to the last
one, with inflation described as “low”.
• In terms of external developments, the Bank
flagged up weaker growth expectations for the
US and eurozone.
• We believe the chances of a rate increase in
December have fallen. We now expect the next
hike in Q1 2011.
Source: Reuters EcoWin Pro
Chart 2: Real GDP (% y/y)
Rates on hold
The Norges Bank kept its policy rate at 2.00% at its
September meeting, consistent with its projections
back in June. The statement accompanying the
decision had a slightly dovish tone compared to the
one in August. In the opening paragraph, the Norges
Bank acknowledged that inflation is low and although
activity is increasing, there is “still some spare
capacity in the economy”. The fact that interest rates
are low in other advanced economies also motivated
the Norges Bank to keep the policy rate unchanged
this time round.
Cautious on external developments
In terms of external developments, although the
Bank mentioned stronger than expected growth in its
main trading partners in H1, it also noted that:
• “growth prospects in the US have been lowered”;
and
• “slightly slower growth is also likely in the euro
area ahead”.
Uncertainty regarding the global economic outlook
remains a cause of concern for the Norges Bank. In
August, the statement merely stated that the outlook
for the US economy is “more uncertain”. The recent
assessment showed that the Norges Bank is more
sure that growth will weaken in the US while its
expectations for the eurozone are not so perky
either.
Lower rates justified
One interesting addition to the statement was the
Norges Bank’s assessment of household debt and
house prices. It noted that “the low interest rate level
in Norway has not triggered an increase in household
Source: Reuters EcoWin Pro
debt growth so far and the rise in house prices is
moderate”. We believe this is one of the reasons the
statement had a somewhat dovish tone compared to
the previous release. Given they were singled out in
the statement, developments in household debt and
house prices will be important to watch, to help
gauge the likely action of the Norges Bank in the
coming months.
In the in-depth assessment, there were also some
interesting details. The Norges Bank noted that “new
information may indicate that inflation in the coming
months will be slightly lower than projected in June”.
We believe this is a hint that a downward revision in
the inflation forecasts will come in the new Monetary
Policy Report in October. But in terms of the outlook
for growth, the assessment was that “overall activity
in the Norwegian economy seems to be expanding
approximately in line with the projections” made three
months ago.
What next?
Overall, although the Norges Bank once again noted
that the interest rate should be “gradually brought
Gizem Kara 23 September 2010
Market Mover
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