As widely expected, today Norges Bank kept rates on hold. However, the interest path was adjusted downwards more than expected by almost 50bp versus a consensus view around 25bp ahead of the meeting. The larger-than-expected downward revision was mainly due to a larger effect from lower domestic growth as oil investments are now expected to drop by approximately 10% in 2015. The other main reason behind the lower rate path was, as expected, lower international interest rates. The rate path now includes a rough 30 % probability of a rate cut before next summer.
Given we do not expect a rate cut this year in Norway and as we expect EONIA rates to drop below zero later this year, we continue to see relative rates as NOK positive this year. Hence, we see value in selling EUR/NOK at the current level.
Today's move is positive for Norwegian bonds and we have seen outperformance over the whole government bond curve today. This morning, we recommended to buy short-dated NGBs given our view that Norges Bank would revise the rate path lower today. We continue to see value in NGB's relative to Germany also as the buy-back programme will continue for the rest of 2014, given the high demand for level 1 assets in Norway and as the carry is still better than for bunds.
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