As expected, Norges Bank (NB) left rates unchanged at 0. 50%.
The statement reiterated the March easing bias but was otherwise very balanced with no clear signals that the bank is planning to cut in June.
Overall the Q&A session brought little new information relative to the released statement. Olsen reiterated that the outlook was roughly unchanged from the March report.
Our expectation. In our base case, we still expect NB to cut the sight deposit rate by 25bp at the meeting in September - marking the bottom in the key policy rate. In our view, today's meeting supports our call that NB will cut in September rather than in June.
Q1 mainland GDP surprised to the upside at 0.3% Q/Q (Danske: + 0.3 %, consensus: 0.2 %). This is higher than NB expected in March MPR (+0.15%). However, due to a downward revision of Q4, the picture is pretty much in line with NB's view. Overall, however, the figures are still on the strong side despite the downward revision, as they suggest signs of stabilisation.
Market reaction. Since the announcements/releases, short-term rates have risen by roughly 3bp across the curve. We now estimate that markets are pricing in 9-12bp worth of easing for the September meeting and 22-25bp cumulative worth of cuts on a 12M horizon (the point where the most easing is priced in).
FX. Post the release we have seen a sharper drop in EUR/NOK than expected. On balance we think the drop is slightly overdone given the amount of new information received. Therefore overall today's decision does not change our view on the NOK: we expect EUR/NOK to trade around current levels in the coming month with the very short-term risks skewed to the upside. We maintain the view that fundamentals limit the medium-term downside potential and that we have to see a growth pick-up end-2016-17, together with a re-pricing of NOK rates, to trigger a sustainable move lower. We forecast EUR/NOK at 9.40 in 1M, 9.30 in 3M, 9.20 in 6M and 8.90 in 12M. Overall we recommend to increase NOK exposure on dips in the coming month.
Fixed Income. The current market discounts a 3m nibor going forward that is higher than NB's projection. This partly reflects a higher spread between the interbank and target interest rate than expected by NB. However, the market seems to discount slightly less than one cut of 25bp going forward, whereas NB indicates a slight probability of a zero rate policy. We think that there is a potential for somewhat lower FRAs going forward. Selling NOK FRAS may be an interesting trade ahead of the NB board meetings in June and September, improved interbank liquidity, and ahead of the potential international political turmoil this summer (Brexit, Greece etc.).
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