The current high inflation in Norway is mainly due to weak NOK in 2015. CPI stood at 3.1%, while core inflation was at 3.4%. The present level of inflation is more than expectations. However, the high inflation is likely to be for a brief period of time as growth in wages in 2016 appears to have become subdued, while real wage growth might turn negative for the first time in decades, according to Danske Bank.
However, the household demand in the country has been only slightly impacted by the slowdown in the oil industry. Retail sales are trending sideways. The jobless rate is somewhat on the upside; however, it is still 4.5%. But regional differences are becoming clearer, which is evident from a weak housing market in the south west region and the rising market in the Oslo area.
In March, Norway’s central bank lowered the interest rate to 0.50% and hinted at a slow rising possibility of further reduction of 2 5bp in 2016. This implies that the Nordea bank might lower the interest rate further in June or September, says Danske Bank.
Nordea Bank’s monetary policy report implies an interest rate trough of 0.20% in 2017. The central bank cannot exclude the possibility of negative interest rates under the scenario of major negative shocks.
“We now look for a June rate cut from Norges Bank bringing the policy rate down to a record low of 0.25%”, says Danske Bank.
The central bank cut forecast for the trough of the forward 3M Nibor to 0.50% by Q3 17, as compared with its earlier forecast of a trough of 0.65%. It forecasts a forward 3M Nibor of a low 0.90% at the end of 2019. However, the market currently up to 10bp higher rates in 2019.
“Given the short-term risk of negative rates, in a strong NOK scenario, the FRA curve 2017 to 2019 should be steeper than projected by Norges Bank. That is, the current market seem