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Norway’s shock spike in core and headline inflation in February suggests Norges Financial institution could preserve charges on maintain regardless of beforehand signalling {that a} reduce was possible on the 27 March assembly. Market pricing is barely -8bp for this week. Nonetheless, EUR/NOK is wanting somewhat low-cost, and we’re bearish on the krone for the following quarter.
Inflation Headache for Norges Financial institution
We consider that Norges Bank will delay its first fee reduce on this cycle and preserve its coverage fee at 4.50% for the fifteenth consecutive month on 27 March. The ahead steerage supplied by the Financial institution within the December and January conferences pointed to a reduce in March, however a pointy rebound in February inflation prompted a hawkish repricing and a consensus shift in direction of a maintain.
Norway’s Inflation Again on the Rise
In January, Norges Financial institution mentioned charges would possible be reduce in March, however that was conditional on information developments broadly following baseline assumptions. The newest projections (from December) embedded some inflation volatility, with headline bouncing round 2.5-3.0% all through 2025. To chop charges at this level, Norges Financial institution would wish to conclude that the massive headline inflation rebound in February (from 2.3% to three.6%) is generally related to short-term components. The difficulty is that underlying inflation additionally jumped far more than anticipated in February, from 2.8% to three.4%, which warns of broad-based worth stress.
Different components look mildly dovish. The worldwide fee image has eased because the final spherical of forecasts, and mainland GDP contracted 0.4% within the fourth quarter. By the way, the krone’s trade-weighted index has strengthened round 3.5% because the January assembly. That clearly provides as much as the somewhat express steerage in January for a March reduce and makes it a reasonably shut name. However we expect the dangers are skewed to a maintain given the inflation shock and dangers of additional inflationary stress from US tariffs.
We nonetheless suppose two or three cuts are potential this yr as inflation could ease again within the coming months, and we count on new fee projections to point out easing solely being delayed by a couple of months.
Nok Rally Nonetheless Seems Overdone
NOK has rocketed greater previously few weeks, at present up 6.4% month-on-month and 9% year-to-date versus the greenback. That’s largely attributable to a lift in European financial and fairness sentiment, however the inflation shock in Norway performed a key function. Markets are pricing in solely 8bp of easing for 27 March and just one reduce within the subsequent 12 months. The 2-year NOK swap fee is now at 4.5%, the best since July 2024 and 220bp above the euro’s.
That mentioned, our truthful worth mannequin exhibits EUR/NOK is undervalued relative to short-term drivers, embedding an extra of optimism relative to European spending optimism and rotation from US equities again to Europe.
So, whereas EUR/NOK might stay pressured this week after a Norges Financial institution maintain, we’re much less optimistic about additional good points and truly see room for a EUR/NOK rebound to 11.50 within the second quarter, when US tariffs could materially mood European sentiment.
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