Norwegian Krone Races Ahead After Norges Bank Signals It's No Closer to Cutting Rates

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The Norwegian Krone raced ahead of its G10 peers after Norges Bank signalled it was no closer to cutting interest rates.

Norges Bank left the deposit rate unchanged at 4.50%, and the new guidance offered little shift from that of December with regard to the policy outlook.

According to Dominic Bunning, Head of European FX Research at HSBC, a key takeaway from the post-decision statement was that the committee still believes that "the policy rate will likely be kept at (the current) level for some time".

The committee also said recent NOK strength was not yet enough to remove the risk of a return to the kind of depreciation that would boost imported inflation rates.

"While this may all seem to be rather unexciting, we believe that the lack of dovish direction from the Norges Bank at a time when many other central banks are pivoting towards an easing bias could provide some support for the NOK," says Bunning.

"By the looks of today's decision, Norway won't see lower interest rates for some time, I fear," says Eve Luneborg, editor at ToppCasinoNorge, a Norwegian small business.

The Pound to Krone exchange rate was down half a per cent in the minutes following the decision at 13.29, with the strong red candle on the daily chart signalling that 2024's trend of appreciation might be done for now.

The Euro to Krone was down by a similar margin at 11.34, and the Dollar to Krone was down half a per cent at 10.40.

HSBC's currency analysts meanwhile expect the Krone to Kroner exchange rate to head back towards parity; NOK/SEK is currently at 0.9959.

"There is now more scope for the pair to extend its recent gains beyond this level as monetary policy divergence looks likely to widen and changes to Norges Bank purchases and Riksbank FX sales work in favour of the NOK relative to the SEK," says Bunning.

Norges Bank has nevertheless taken a small shift in direction, by dropping any reference to the potential for further hikes.

Governor Ida Wolden Bache said "the Committee assesses that the policy rate is sufficiently high to return inflation to target within a reasonable time horizon". In December, the wording was "close to the level required", and the rate path peaked at 4.55% in Q2 2024.

But the bar to cutting rates has been set high, with Norges Bank stating:

"There will likely be a need to maintain a tight monetary policy stance for some time ahead. Further out, when inflation falls back and economic conditions so warrant, the Committee can start lowering the policy rate."

This implies that falling inflation alone is not a prerequisite to cutting interest rates; the economic data must also be sufficiently weak.