The greenback plunged against the Norwegian krone after Norway’s central bank (Norges Bank) raised the benchmark interest rate in the monetary policy meeting held yesterday, in line with its previous guidance. More importantly, the Norges Bank hinted at the possibility of more hikes this year, mainly due to better-than-anticipated growth and inflation fluctuating near the intended level. From a high of 8.7016, the USD/NOK pair declined to a low of 8.5349 in the past 24 hours.
After leaving the interest rate unchanged in May, the central bank’s Executive Board announced a benchmark rate hike of 25 basis points to 1.25%. Notably, Norges bank had implemented a 25 basis point rate hike in March 2019 as well. In September 2018, the central bank announced a rate hike for the first time since 2011.
Norges Bank Governor Oystein Olsen gave the following reason for the rate hike: “Our current assessment of the outlook and balance of risks suggests that the policy rate will most likely be increased further in the course of 2019.”
The central bank also opined that trade tensions are the main reason for uncertainty.
The bank added, “Uncertainty surrounding the effects of monetary policy suggests a cautious approach to interest rate setting.”
The central bank also provided its interest rate outlook, which signaled quicker than anticipated rate hikes in 2019 than forecast in March. The bank, however, does not expect any change in the policy rate path after the end of this year. The central bank anticipates the rebound in the Norwegian economy to be slightly robust in 2020 than forecast earlier and inflation to stay close to the desired level.
Regarding the central bank’s decision to implement further rate hikes in 2019, Danske Bank analysts said: “The message is clearly hawkish as a strong domestic business cycle suggests a further front-loading of monetary tightening despite elevated international uncertainty at present.”
Based on the rate path, the analysts also expect a 70% to 80% chance of a rate hike in September 2019 and about 70% probability of an additional rate hike in 2020.
On June 12th, the IMF (International Monetary Fund) stated that the Norwegian economy grew 2.20% in 2018. The Fund expects the economy to grow at 2.5% in 2019 and 2.1% in 2020. Core inflation is currently at 2.25%, above the central bank target level of 2%.
Contrary to the US Federal Reserve and the European Central Bank, which have signaled likely monetary easing due to concerns over the global economic slowdown, Norges Bank is hinting at policy tightening. As rate hikes usually attract investment inflow, a further strengthening of the Norwegian krone can be anticipated.
The historical price chart indicates that the USD/NOK pair is declining after facing resistance at 8.7450. The currency pair is trading below its 50-day moving average. Furthermore, the stochastic indicator is in the bearish zone. As a result, we can expect the currency pair to remain bearish in the short-term.
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