Pound Surges 1.0% on Krone thanks to Norges Bank's Dovish Hike
The Executive Board of the Norges Bank. Image © Norges Bank 2018
- Norges Bank raises rates for first time since 2011
- Yet Krone falls as forward guidance tepid
- GBP/NOK forecast to end year at 10.36
Norway's central bank raised its base interest rate by 0.25% on Thursday, but the Norwegian Krone dropped after policymakers lowered their expectations for further rate rises next year.
The Norges Bank's Excutive Board decided to lift its policy rate to 0.75% from 0.5%, in line with most economists expectations.
The move was prompted by accelerating inflation in Norway partly caused by rising oil prices as the country is a major oil producer.
Normally, if central bank's increase interest rates it spurs currencies to appreciate but this was not the case with the Krone which fell. The Pound-to-Krone exchange rate has risen from a pre-announcement 10.72084 to a rate of 10.84921 at the time of writing.
The reason the Krone weakened was because the Norges bank revised down its projection for the interest rate path in 2019 and financial markets tend to price-in future scenarios.
In a statement, the Norges Bank said it would "most likely” have to raise rates again in Q1 2019 with two more hikes overall in the year.
This contrasted with its statement in June when it expected to raise rates to a higher level by the end of the year albeit starting from a later date.
Richard Kelly, head of global strategy at TD Securities, says the Norges bank's caution, "in part" reflected "some mild disappointment in hard data and wages."
Kelly himself sees an even shallower rate path with the next rate hike not until Q2 2019, because of the stronger Krone, which will keep a lid on inflation.
Georgette Boele, senior FX strategist at ABN Amro sees the Krone's post-meeting dive as likely to be short-lived as she expects the Krone to recover and start rallying during the remainder of 2018.
"We expect the krone to rise for the remainder of this year and the next versus the euro. For a start, the Norges Bank has already started with tightening monetary policy today, far ahead of the ECB," says Boele.
The rise versus the Euro, however, will be more as a result of a row-back by the ECB which will surprise markets than more NOK strength per se.
The price of oil will also rise up until June 2019 benefiting the Norwegian unit.
"Our energy analyst forecasts a Brent oil price of USD 90 per barrel and a WTI oil price of USD 83 per barrel in June 2019. This is an increase of around 15%. It is likely that this will result in a higher krone, as the Norwegian economy will profit from a higher oil price," says Boele.
ABN forecast EUR/NOK to end the year at 9.20 and 2019 at 8.40. They foresee USD/NOK at 8.00 at the end of '18 and 6.72 at the end of '19 (see table below).
This infers a GBP/NOK rate of 10.36 by year-end and 9.54 by end of 2019 based on ABN AMRO's forecasts for GBP/USD and EUR/GBP averaged out.
The Norge's bank also lowered its growth projections from those announced in June, due to concerns over global trade conflicts.
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