The Week Ahead (Mar 18-22), Knock On Norwegian Wood

By Steven Levine

Norway is preparing to set its course for monetary policy in the week ahead, as it contends with a recent uptick in inflation.

The Norges Bank is slated Thursday to unveil its interest rate decision, while its consumer price index (CPI) has averaged roughly 3% on a year-over-year basis over the past 12 months. The gauge in February registered 3.0%, down just slightly from 3.1% in the previous month, underscored by a monthly rise in clothing and household needs.

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In its Monetary Policy Report 4/18, the central bank attributed the higher consumer prices over the past year to a “substantial increase in electricity prices.” The bank also observed that underlying inflation has also moved higher, “driven in part by a pick-up in wage growth,” which are likely to increase further due to tighter labor market conditions. 

Norges Bank’s executive board elected in January to keep its policy rate unchanged at 0.75%.

The bank noted that its “outlook and the balance of risks imply a gradual increase in the policy rate.

“Global growth is a little weaker than projected, and there continues to be considerable uncertainty surrounding developments ahead.”

In Norway, economic growth and labor market developments appear to be broadly as the bank anticipated, while inflation has been slightly higher than expected.

Against this backdrop, Norwegian equities appear to be lifting after a near 25% plunge from late September to December 24. The iShares MSCI Norway ETF (BATS: ENOR) has risen more than 12% off of its latest 52-week low.

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Investors have also been generally optimistic about Norway’s ability to honor its public debt obligations. Spreads on the country’s five-year credit default swaps (CDS) were recently quoted about 0.1bp tighter over the past three months to just south of 13.4bps.

Moody’s Investors Service said earlier in March that the country’s credit profile is buttressed by its “’Very High (-)’ economic strength, reflecting a large and resilient economy characterized by very high per capita income and strong competitiveness,” as well as its “‘Very High (+)’ institutional strength, reflecting very strong governance profile, effective and transparent macroeconomic framework and consensus-based policy formulation.”

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The author does not hold any positions in the financial instruments referenced in the materials provided.

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