Norges Bank delivers expected rate hike, SNB cuts inflation forecasts

Summary:

• Norwegian central bank lifts interest rates as broadly expected

• NOK falls in the aftermath as there were hopes for another rate hike in December

• SNB stays on hold citing the strong franc as a reason behind a cut of inflation projections

The two central bank decisions scheduled for today came in line with expectations with the Swiss National Bank leaving rates unchanged and the Norges Bank delivering a long-awaited rate hike for the first time since 2011. While the Swiss franc did not respond at all, the Norwegian krone declined immediately after the decision as market participants had expected the more hawkish rate path.

The Norges Bank lowered its rate hike path compared to its latest projections. Source: Norges Bank, XTB Research

The main policy rate in Norway was lifted by 25 basis points to 0.75% and the move had been widely anticipated as the central bank had offered the first signal to do so in June, and then it had reiterated its stance. On this basis market participants took this hike for granted paying their attention elsewhere - to the outlook for next moves. In this field the Norway’s central bank did not meet expectations forecasting the next rate hike to take place in March 2019 and then four hikes until the end of 2020. In turn, there was guesswork the bank could point to the next move as soon as December given the fact the inflation accelerated well above its projections. On top of that we were offered almost the same assessment of financial imbalances as it was described as “little changed since the second quarter”. The important point was made regarding the risks to the economic outlook. The central bank enumerated three particularly crucial risks to watch ahead - commercial real estate, indebtedness of households and non-bank financial institutions. Could the Norwegian krone strengthen from the current levels? There is no doubt that fundamentals of the Norway’s economy remain firm hence it seems to be reasonable to expect the NOK to march gradually higher in the medium-term. One also needs to add that the currency is priced attractively based on a REER approach suggesting the NOK offers ‘value’ and it coincides with the hawkish stance of the country’s central bank unlike the Riksbank.

While the NOK has declined following the Norges Bank decision it should be only a corrective pullback given the central bank’s rhetoric and sound fundamental factors. Therefore, we are expecting that new long positions could be rebuild in the course of time with 8.40 acting like the strong resistance from a technical point of view. Looking broader, we stick to our view that the NOK ought to strengthen gradually against the US dollar with targets determined at 8.00, 7.70 and 7.30. Source: xStation5

Compared what the Norges Bank did, the decision of the SNB could be classified as a non-event. The Swiss central bank failed to fit in other central banks’ rhetoric which has become more hawkish undeniably. Instead, the SNB cut its inflation forecasts for 2019 and 2020 citing, among others, the strong currency calling it “highly valued”. The 2019 projection was lowered to 0.8% from 0.9% whereas the 2020 projection was slashed substantially to 1.2% from 1.6% previously. The bank also pledged to intervene in the FX market and signalled that following strong GDP growth in previous quarters, pace is expected to slow slightly. It looks that the Swiss central bank remains the most dovish compared to its G10 peers (even the BoJ has recently begun cautiously setting the stage for an exit from remarkably loose monetary policy). By and large, the franc should be still driven by external factors and changes in risk appetite.

Taking a look at the weekly chart of the EURCHF one may suppose the pair could fall toward 1.1150 before recovering unless the price is able to move through and stay above the 50% retracement till the end of the week. Source: xStation5