We expect Norges Bank (NB) to deliver a 25bp rate cut on Thursday. NB is se to keep the easing bias by presenting a new rate path with a 50% implied probability of another rate cut before June. We do not, however, expect Norges Bank to cut rates further post March.
Even though key figures have been mixed, the central bank has a history of preferring the Regional Survey as a guidance. This implies a downward adjustment of GDP growth in 2015. The wage growth ended up weaker than expected in 2014 and signals from the labour market organisations point to a moderate wage settlement this year. Global rates have dropped since the December report, adding downward pressure to the interest rate path.
FX Strategy: We expect EUR/NOK to bounce around the NB meeting before a trend lower in the cross constitutes. Leverage funds should look to sell EUR/NOK post the NB meeting. Corporates should hedge NOK income via option structures that maintain a profit potential.
Fixed-Income Strategy: All in all, we see downside to NOK money market rates after the announcement, but we think from a risk reward perspective that more value is found in the long end of the NOK yield curve. We recommend to buy 10-Year NGBs against bunds or alternatively to receive NOK swap 5y5y against EUR, especially for those not interested in the FX exposure.
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