While we expect the Norges Bank to leave its key policy interest rate on hold at 1.50% into 2022, the persistence of above-target core inflation in Norway will ensure that it maintains a comparatively hawkish bias over the coming years.
Norwegian core inflation holds steady
- While we expect the Norges Bank to leave its key policy interest rate on hold at 1.50% into 2022, the persistence of above-target core inflation in Norway will ensure that it maintains a comparatively hawkish bias over the coming years.
- Having fallen to a 22-month low in September (1.5%), the headline inflation rate in Norway rose to 1.8% in October. The Norges Bank’s target variable – CPI-ATE, which excludes energy prices and the impact of tax changes – remained unchanged at 2.2%. (See Table 1.) The latter was slightly below the consensus forecast and the krone has fallen against the euro since the release.
- Looking ahead, we expect CPI-ATE to remain close to its 2% target over the coming years as the Norwegian economy continues to perform comparatively well and recent falls in the krone add to the prices of imported consumer goods. We expect the inflation rate in the latter to rise from 0.9% in October to a peak of around 3% in the middle of next year. (See Chart 1).
- Meanwhile, the small tick-up in the headline inflation rate in Denmark, from 0.5% in September to 0.6%, was driven by a rise in goods inflation (from -0.4% to -0.3%). In contrast, services inflation was unchanged from September, at 1.2%. The key point is that inflation pressures are likely to remain extremely weak for the foreseeable future.
- Meanwhile, other data released today showed that growth in Danish goods exports slowed, from 3.2% q/q in Q2 to about 1% in Q3, and import growth accelerated. All told, this supports our view that net trade was a drag on GDP in Denmark in the third quarter (note that the first reading of the Q3 GDP data are scheduled for release on Wednesday).
Chart 1: Norway Exchange Rate & Imported Goods Inflation
Sources: Refinitiv, Capital Economics
Table 1: Norway Consumer Prices
CPI-ATE Consumer Goods
David Oxley, Senior Europe Economist, +44 20 7811 3906, email@example.com