Capital Economics Predicts Norges Bank Interest Rate Cuts

Investing.com — Analysts at Capital Economics have maintained their forecast for Norges Bank, anticipating that Norway’s central bank will begin reducing its policy interest rate in March 2023. This prediction comes despite December’s inflation figures being lower than expected.

The firm expects a gradual rate reduction, proposing cuts to occur once per quarter until the key policy rate reaches 3% by mid-2026.

During its December meeting, Norges Bank held the policy rate steady at 4.5%, indicating a potential reduction in March if the economy performed as anticipated. Despite this, December inflation data showed a decline to 2.2%, down from November’s 2.4%, which was unexpected compared to the bank’s forecast of an increase to 2.8%. Additionally, the core CPI-ATE fell from 3.0% to 2.7%, slightly below the predicted 2.8%.

Capital Economics believes that the lower-than-expected inflation will not prompt Norges Bank to hasten its planned rate cut for next week. Historically, the policy rate has remained unchanged even with low inflation rates due to factors like strong wage growth and a weak Norwegian krone. Current trends supporting this view include ongoing wage growth plus the trade-weighted exchange rate.

The future pace and extent of rate cuts post-March remain uncertain, with the bank indicating a more conservative approach, projecting the policy rate to hit 3% by early 2027. Still, Capital Economics warns against over-reliance on these projections, citing previous inaccuracies in central banks’ own forecasts.

Expectations for the Norwegian economy include steady growth in the coming years, suggesting that aggressive rate cuts are unnecessary. Policymakers have shown concern over maintaining overly tight monetary policy to avoid imposing excessive economic restrictions while achieving reasonable inflation targets.

The firm also forecasts a slower decline in core inflation compared to the previous year, as the labor market relaxes and wage growth potentially diminishes. Moreover, a strengthening krone is expected to further contribute to lower services inflation.

Considering these elements, Capital Economics believes Norges Bank will transition to a more neutral monetary stance, estimating the equilibrium real rate to be between -0.5% and +0.5%, based on a central bank research paper published in 2022.

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