Norges Bank to hike in May and keep the door open for more
The desk anticipates a 25 basis point rate hike from Norges Bank on May 7, driven by persistent inflationary pressures and recent developments in the oil market. Per the full note from ing-think, this hike is viewed as necessary to address broad-based inflation concerns, and a delay would merely push the decision to June. The desk expects this move to trigger another rally in the Norwegian krone (NOK), although the longevity of this rally will be contingent on global risk sentiment remaining robust. With no high-impact events on the calendar in the next month, the focus will remain squarely on Norges Bank's actions and statements.
What the desk is arguing
Norges Bank is likely to raise its key interest rate by 25 basis points in May, driven by high inflation rates that have been worsened by the fluctuations in the oil market. The decision to hike aligns with a broader trend of central banks reacting decisively to inflationary pressures.
Moreover, if Norges Bank opts to hold rates in May, the deployment of a rate hike would likely just shift to June, continuing the narrative of urgency around inflation. The NOK is expected to strengthen again following this anticipated hike; however, its long-term strength will depend on the persistence of global risk sentiment and oil price stability.
Where it sits in our coverage
Our current consensus target for the NOK stands at 1.075, reflecting a cautious but optimistic outlook on the currency's performance amid rising interest rates. This stance is aligned with the implied direction of Norges Bank’s policy adjustments—supportive of a stronger NOK if rate hikes proceed as anticipated.
Competitive views on the NOK include: - JPMorgan: Target set at 1.10 for Dec-26 - Barclays: Target at 1.08 for Dec-26 - Goldman Sachs: Anticipated target of 1.06 for Dec-26
How other firms see it
Some firms exhibit a contrary stance regarding Norway’s monetary policy direction. For instance, Bank of America does not anticipate a rate hike until later dates, pointing to underlying economic risks that may temper the central bank's actions.
Other more bullish firms align with our view, including: - JPMorgan - Barclays - Goldman Sachs
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Norges Bank is expected to raise rates by 25bps in May, contrary to the consensus view.
- 02Inflation concerns and oil market fluctuations are key drivers behind this anticipated hike.
- 03NOK may see a short-term rally depending on global risk sentiment.
Market implications
A decisive interest rate increase from Norges Bank could lead to a stronger NOK against major currencies. If inflation continues to exert pressure, further hikes could be greenlit, enhancing the currency's appeal to investors seeking yield amidst global uncertainty.
Risks to this view
Potential risks include a failure to hike in May, which could create a downturn in NOK sentiment. Additionally, prolonged volatility in the oil market or deteriorating global economic conditions could undermine the effectiveness of rate hikes.
Sources & References
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