ING’s Francesco Pesole notes that Norges Bank delivered a hawkish shift, signalling upcoming rate hikes as inflation concerns extend beyond the energy shock. The bank now fully prices at least one hike in its projections, while ING expects only one move given its bearish Oil and gas baseline. ING still sees a downward-sloping EUR/NOK profile with solid Norwegian Krone prospects.

Hawkish repricing and NOK implications

"We had expected a hawkish shift in today’s Norges bank meeting, but the kind of commitment to rate increases that emerged in the statement came as a surprise. A near 10bp jump in 1-year NOK swap rates – on top of the +43bp move since the start of the war – signals markets were equally surprised by the hawkish messaging."

"But explicit concerns about broad-based inflationary issues and indications that other macro factors can favour inflation entrenching in Norway make us believe at least one hike is now looking likely. Incidentally, the committee noted that should it not hike, the krone could depreciate and remove a cushion for reduced imported inflation."

"Oil prices and incoming inflation figures will determine the timing. Markets are pricing in 16bp for May and 33bp for June. Considering some members already wanted to hike today, May looks slightly more likely. For now, we are only calling for one rate hike on the back of our bearish baseline view for oil and gas prices, but the chances of delivering two (fully priced in) are elevated."

"The NOK swap curve currently shows 60bp of tightening in the next year. As discussed above, two hikes are a tangible possibility (even if not our base case for now), but the 4.0% policy rate is already restrictive, especially in real terms. Even in Norges Bank’s latest projections, inflation would peak around 3.5%."

"We feel we are very close to the peak for front-end NOK swap rates and see risks on the downside."

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