Nordea’s Kjetil Olsen notes that Norwegian core inflation remains at 3.0%, above Norges Bank’s projections and far from its 2% target, with unemployment lower than expected. He argues this raises questions about how restrictive current policy is and how long Norges Bank can prioritize employment, suggesting a higher probability of a rate hike before summer, especially with Middle East-driven energy price risks.

Higher inflation keeps rate hike risk alive

"Core inflation came in at 3.0%, in line with consensus and us and 0.4pp higher than Norges Bank. Last month, core inflation was 0.5pp higher than Norges Bank anticipated. Inflation is therefore clearly higher than the central bank has thought, but probably not high enough for them to hike in March already."

"But we are very uncertain and cannot rule that out. The rate path is definitely up and the probability for a rate hike somewhat later is high."

"In effect, there has been no progress towards the 2% target for the last two years and 2026 marks the fifth year with inflation substantially above target."

"For how long can Norges Bank “afford” to put a lot of weight on the employment side of their mandate?"

"At some point, Norges Bank has to evaluate their own monetary policy and at least discuss wether they must start to put a higher weight on bringing inflation down than so far. We think they are closing in on that point and cannot at all rule out that that they will put action to the words of the governor in her annual speech in February: “We will ensure that inflation is brought back to 2 percent.”"

"On the margin therefore, the war will pull inflation higher but the overall negative growth effect will be small. The war therefore also pulls in the direction of higher rates, all else equal."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)