As expected, NorgesBank (NB) this morning left the sight deposit rate unchanged at 0.50% .
The revised rate path suggests a 40% probability of a later rate cut , which was very close to our expectations. Meanwhile, NB signaled that the bottom in the revised rate path is first reached in Q2 17 , which was less aggressive than we had penciled in. Also, the rhetoric in the Monetary Policy Report (MPR) was more hawkish than expected, highlighting the Board's move towards a 'neutral' bias .
Specifically, NB stated that 'the outlook suggests that the key policy rate will most likely remain at today's level in the period ahead and that &the forecast implies a slightly higher probability of a decrease than an increase in the key policy rate in the year ahead' .
Market reaction : Prior to the decision, markets had priced in around a 5-10% probability of a rate cut today. Post the decision, short-term rates have risen with markets pricing out the likelihood of a 2017 cut. As expected, EUR/NOK initially dropped on the announcement but the more hawkish-than-expected rhetoric also meant that we did not get the expected rebound in the cross.
Our expectation : Given our economic forecasts and NB's gradual move towards a 'neutral' bias today, we expect NB to leave the sight deposit rate unchanged throughout 2017.
FX : Today's decision raises the downside risk to our EUR/NOK forecast but we still do not expect today's decision to be the trigger for sustainable NOK appreciation (which we still first pencil in for 2017). Having said this, the breach of important technical barriers to the downside is likely to send the cross lower over the coming days which - given the latest change in positioning - could open up for attractive tactical buying opportunities.
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