The Norges Bank brings a hike forward

The Norges Bank raised the policy rate by 25bp to 4.25% for the first time since 2023, contrary to our expectation that it would wait until June before hiking.

Still, this is a timing surprise, not a change in the broader policy story. The March statement had already signalled that a hike would likely be appropriate at one of the forthcoming meetings, and the May decision confirms that the Committee judged recent inflation news, wage growth, and the energy shock to be sufficient to act without waiting for the June Monetary Policy Report.

The decision also shows that Norges Bank is less constrained by the interim-meeting format than we assumed.

We previously argued that June offered a cleaner platform because it would include updated forecasts and a full macro framework. The Committee instead treated the March projections as still valid, stating that the monetary policy outlook has not changed materially. That matters because the May hike should not be read as a fresh hawkish escalation.

It is the earlier delivery of tightening already embedded in the March framework, which pointed to a policy rate between 4.25% and 4.5% by year-end.

Even so, we can see why the recent evolution of data supports such a move. Inflation remains too high, with CPI at 3.6% YoY and CPI-ATE at 3.0%, while the Middle East war continues to keep energy and external price pressures elevated. Other factors have broadly met the Bank’s prior expectations. Wage growth is running close to the March projections, while domestic activity shows few signs of weakness.

Against this backdrop, the risk of sticky inflation psychology is harder to tolerate, with general economic conditions doing little to weigh against rising price pressures.

Still, for NOK, the implications of today’s decision are supportive at the margin. The immediate rate signal is positive for the krone, even as a stronger NOK appreciation will dampen imported inflation. That should limit the need to price a much more aggressive hiking cycle unless April and May inflation data surprise materially higher. The June meeting now becomes less about whether Norges Bank can justify a hike, and more about whether it needs to signal another one.

Author:

Barry van der Laan MBA, Senior FX Market Strategist

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