Norwegian Krone: Restrictive Norges Bank stance and downside risks - Commerzbank

Commerzbank’s Antje Praefcke clarifies that the Norwegian Central Bank, Norges Bank, has maintained its policy rate at 4.25% and indicates the possibility of further tightening due to inflation staying above the target level. However, forthcoming data, particularly the August inflation figures, could lead the bank to abandon its year-end hike prediction.

Weaker fundamentals and lower oil prices might see EUR/NOK exceed 11 by the year's end. Despite Norges Bank's reluctance to overburden the economy with a restrictive monetary policy, they believe a restrictive stance remains essential to bring inflation to the target within a reasonable timeframe. The bank may reconsider the need for another rate hike if the incoming data supports it, as projected in June.

The upcoming data, particularly August inflation, will be crucial in determining the future course of Norges Bank's monetary policy. If other fundamental data appears weaker at the same time, the market could anticipate a further rate hike being called off, causing the NOK to depreciate further. Additionally, if oil prices fall due to a Middle East agreement, the NOK is likely to experience a correction.

Should the NOK exchange rate surpass 11 in EUR/NOK by the end of the year, it would signal significant depreciation. Norges Bank acknowledges that inflation has been lower than projected but remains cautious. Inflation is still considerably higher than the 2% target, with the headline rate at 3% year-over-year and the core rate at 2.7% in July.

The persistent rise in business costs and recent years' inflationary pressures will keep inflation elevated.