Norway Inflation Surprise Puts March Rate Cut Plan in Doubt

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(Bloomberg) — Norway’s inflation accelerated more than expected last month, throwing in doubt Norges Bank’s long-awaited first interest-rate cut in two weeks.

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Underlying consumer-price growth that excludes energy costs rose to 3.4% in February, the highest level in eight months, according to data from the statistics office on Monday. That topped the highest estimate in a Bloomberg survey with a median forecast of 2.9%, while Norges Bank projected a 2.7% gain. 

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The increase in headline prices also exceeded forecasts.

Norwegian policymakers have been the only ones in the G-10 sphere of major currency jurisdictions — aside from Japan — to still hold out on post-pandemic easing, though they’ve long-communicated a plan for a key-rate reduction at the March 26 meeting. 

Monday’s data revives questions about whether policymakers may yet again postpone the move, with their decision due to be announced a day later. 

Traders in overnight swaps pared back expectations for a March cut, seeing a 56% chance for a quarter-point reduction versus 91% seen on Friday. They now price in 28 basis points of cuts by August, down from 41 basis points.

“This inflation figure was so much higher than anticipated that Norges Bank need to think twice about cutting rates at all this year,” Nordea Bank Abp’s analysts Kjetil Olsen and Sara Midtgaard said in a note to clients. “The March cut is definitely off.”

The krone traded as much as 1% higher at 11.6410 versus the euro and headed for a sixth daily gain versus the dollar, the longest winning streak in two years.

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“The krone has rallied on the heels of the data, but the currency has the potential to strengthen further in the face of what is likely to be a shallow cycle of rate cuts from Norges Bank. The krone is also well-placed historically among the G-10 currencies to make the most of any broad weakness in the greenback.”

—Ven Ram, Cross-Assets Strategist, Dubai

The inflation data, which mirrors development in neighboring Sweden, follows recent evidence that the economy is improving, including a decline in registered unemployment and strengthening in retail sales. The robust energy sector has outweighed the effects of credit costs at a 16-year high.

The most recent guidance from Governor Ida Wolden Bache has been that borrowing costs are set to be lowered three times by year-end, to 3.75%.

Some analysts said the outcome of the March rate meeting wasn’t yet clear-cut.

“Perhaps we should be cautious about completely questioning Norges Bank’s planned rate cut in March,” analysts at Svenska Handelsbanken AB said in a note to clients. 

“However, there is little doubt today that the interest rate path will be revised upward,” they said. “Interest rate expectations among our (European) trading partners have risen significantly since December – with last week acting as a game changer – and in addition, Norges Bank has clearly underestimated price pressures.”

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The headline inflation rate also rose to 3.6%, a ten-month high. That’s well above the 2.6% forecast of the analysts and the central bank. Price growth was mainly driven by electricity and food, the statistics office said.

“We now doubt whether Norges Bank ‘dares’ to cut interest rates in March with these inflation figures,” Sparebank 1 Markets AS analysts Harald Magnus Andreassen and Dane Cekov said in a note to clients. They added they still think the bank will proceed with the March cut, but it will likely be the only one this year.

—With assistance from Joel Rinneby, Vassilis Karamanis and Ven Ram.

(Updates with economists, market reaction from first paragraph.)

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