Capital Economics maintains its forecast for Norges Bank to start reducing its policy interest rate in March 2023. The firm anticipates a gradual reduction, despite December's inflation figures coming in lower than expected.
Capital Economics analysts have maintained their prediction that the Norges Bank , Norway 's central bank, will commence reducing its policy interest rate in March 2023. This forecast persists despite December's inflation figures falling short of expectations. The firm anticipates a gradual rate reduction, with cuts implemented quarterly until the key policy rate reaches 3% by mid-2026. In its December meeting, Norges Bank chose to keep the policy rate steady at 4.5%.
The bank had previously hinted at a potential rate reduction in March if the economy progressed as anticipated. However, December's inflation data revealed a decrease to 2.2% from November's 2.4%, defying the central bank's projection of an increase to 2.8%. Core CPI-ATE also declined from 3.0% to 2.7%, marginally below the forecasted 2.8%.Capital Economics, however, does not believe this unexpected dip in inflation will prompt Norges Bank to accelerate its planned rate cut to the coming week. Historically, even when inflation rates undershot the bank's forecasts, the policy rate remained unchanged. This was influenced by factors like robust wage growth and the weakening Norwegian krone. Current wage growth trends and the trade-weighted exchange rate lend credence to the analysts' view that the central bank will adhere to its March timeline for the rate reduction. The pace and extent of future rate cuts by Norges Bank after March remain less certain, according to Capital Economics. The bank's own forecasts suggest a more cautious approach, with the policy rate reaching 3% by early 2027. However, the firm cautions against overreliance on these projections, citing the historical inaccuracy of central banks' forecasts for their own policy rates. Capital Economics anticipates steady economic growth in Norway in the coming years, implying that there's no pressing need for aggressive rate cuts. Policymakers have expressed concerns about maintaining overly tight monetary policy, aiming to avoid undue economic constraints while achieving inflation targets within a reasonable timeframe. The firm also predicts a decline in core inflation, albeit at a slower rate than last year, as the labor market eases and wage growth potentially moderates. This, coupled with a projected strengthening of the krone, is expected to contribute to lower services inflation. Considering these factors, Capital Economics believes Norges Bank will transition towards a more neutral monetary stance, with the equilibrium real rate estimated to be between -0.5% and +0.5%, as indicated by a central bank research paper published in 2022
Norges Bank Interest Rate Inflation Norway Capital Economics Monetary Policy
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