The Norges Bank Regional Network Survey (RNS) has just been published. The key aggregate output index for the next six months rose to 0.75 (from 0.28 in June) indicating a further improvement in the private sector outlook. Specifically, the RNS points to mainland GDP growing roughly 0.5 % q/q in Q3 and Q4 (including public sector). This is better than the 0.3% that Norges Bank projected in June when they 'guaranteed' a September rate cut.
While over the last month we have argued that the probability of near-term Norges Bank (NB) easing was much closer to 50/50 than the 0% priced in markets, today's release is in our view the pivotal release that allows NB to remain on the sidelines at the upcoming 22 September meeting. We therefore change our call to 'unchanged' rates in September but still think it is likely that in H2 16 NB will more directly address the tight NOK liquidity issues that have driven an implicit monetary tightening in Norway (for more details see The US Money Market Reform - The Scandi angle , 9 August 2016, and Norges Bank Dilemma - Too early to rule out monetary policy easing , 11 August 2016). In terms of the revised rate path that NB will present next week, we think Governor Olsen will leave open the probability of a rate cut in December (i.e. roughly 50/50). This is close-to-current market pricing.
RNS details: In terms of growth divisions , all sector outlooks have improved with the 'Export industry' and 'Construction' in particular jumping from the Q2 survey (chart 4 and 6) . It is especially important that the 'Commercial sector' outlook has improved further (chart 6) since this sector makes up close to one-third of the economy. The regional indices still point to large differences, although the outlook in the Western oil-heavy parts looks much better than last year (chart 8). In sum, the details of the report are also encouraging, which supports unchanged rates in September.
To read the entire report Please click on the pdf File Below