- The economic, inflation and global outlook have been roughly in line with NB's projections.
- Lower global rates and higher money market spreads are counteracted by a weaker exchange rate and a more expansionary fiscal policy for 2016.
Admittedly, however, it has become a very close call - in our view close to even odds - amid the renewed collapse in oil prices, which could trigger another 25bp 'insurance cut' in the same way as in Dec 2014 and Sep 2015.
If we are right in our call we expect NB to indicate a very dovish stance by lowering the rate path, signalling a close to 100% probability of a rate cut in March. The current rate path from September has a 64% implied probability of another 25bp rate cut before Q4 16.
Main risk factor. The largest risk factor is that of Governor Olsen cutting rates in another pre-emptive move. In this case we would expect the rate path to signal a considerable probability of future rate cuts, leaving markets to price in the risk of zero rates in Norway.
Market pricing. We estimate that markets are pricing in a roughly 50% probability of a 25bp December rate cut, a full 25bp rate cut for the March meeting and an accumulated 40-45bp worth of cuts on a 9-12M horizon (the period where the most easing is priced in).
FX. Going into the meeting we regard EUR/NOK risks as highly asymmetric. If we are right in our call we think the downside potential is very limited due to 1) 2016 market pricing reflecting our rate path call, 2) the current bearish environment for oil, 3) poor NOK December liquidity as well as 4) general reduction in year-end risk appetite. Meanwhile a cut could send the cross substantially higher into technically uncharted territory.
Fixed Income. Risk-reward, there may be some value in buying NOK FRA 3M MAR 2016 ahead of the meeting.
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