Norges Bank delivered a hawkish shift in its latest meeting, signaling upcoming rate hikes due to inflation concerns that extend beyond the energy shock, according to ING’s Francesco Pesole [1]. The bank now fully prices at least one hike in its projections, with ING expecting only one move based on its bearish oil and gas baseline [1]. The commitment to rate increases in the statement surprised both ING and the market, as evidenced by a near 10 basis point jump in 1-year NOK swap rates, adding to the +43 basis point move since the start of the war [1].
Explicit concerns about broad-based inflationary issues and indications that other macro factors could favor inflation entrenchment in Norway were highlighted by the committee. The committee noted that not hiking could lead to krone depreciation, potentially removing a cushion for reduced imported inflation [1]. Oil prices and incoming inflation figures will determine the timing of the hikes, with markets pricing in 16 basis points for May and 33 basis points for June. Some committee members already wanted to hike at the current meeting, making May a slightly more likely candidate for the next move [1].
Currently, the NOK swap curve shows 60 basis points of tightening over the next year, and while two hikes are a tangible possibility, ING’s base case remains only one hike due to its bearish outlook for oil and gas prices [1]. The 4.0% policy rate is already considered restrictive, especially in real terms, and Norges Bank’s latest projections suggest inflation would peak around 3.5% [1]. ING believes the market is very close to the peak for front-end NOK swap rates and sees risks on the downside [1].
Overall, the hawkish repricing has supported the Norwegian Krone, with ING maintaining a downward-sloping EUR/NOK profile and solid prospects for the currency [1].
CONCLUSION
Norges Bank’s unexpected hawkish shift has surprised markets and led to a repricing of rate hike expectations, supporting the Norwegian Krone. While ING expects only one hike, the possibility of two remains elevated, with inflation and oil prices as key determinants. The restrictive policy rate and peak inflation projections suggest limited upside for further tightening.