Last month, economists at CIBC underlined that the Norwegian krone was a laggard amidst crowded positioning and data disappointments, including a material miss in Q1 GDP. However, despite the slow start to the year, they anticipated that the easing in lockdown restrictions would encourage a substantive rebound from Q2 onwards, and see the Norges Bank accelerate their tightening bias as a result – supporting the NOK.
“The recent central bank policy update underlined that the easing of policy restrictions would result in the economy reaching pre-pandemic levels by the end of July. But May’s mainland GDP advance of 1.8%, more than twice the central bank’s expectation, suggests that the economy is already operating at pre-pandemic levels.”
“In view of the economy having reached such levels, we expect the Norges Bank to follow through by hiking in September. That would make it a leader amongst global central banks, despite the Norges Bank recently revising down its inflation profile. The bank assumes that NOK gains and moderate wage growth will preclude a substantive inflation pick up.”
“A faster than expected 2022 growth trajectory, (the central bank now assumes a 4.1% gain compared with 3.4% in Q1), underlines policy activism. We expect a 25bp hike in September and a further 25bp hike in each subsequent quarter until the middle of next year. We also expect the economy to benefit from elevated oil prices.”
“With a degree of fiscal pump priming also likely to be unveiled ahead of the September 13 election, the combination of faster growth, monetary tightening, and fiscal easing points towards a positive NOK bias in H2.”
