As mentioned, this is a close call. But on balance, we still see a cut as slightly more likely – driven primarily by market-related factors.
NOK levels have consistently played a key role in Norges Bank’s policy decisions. Given the krone’s low liquidity, sell-offs tend to be sharp, and the Bank has viewed currency depreciation as a key inflationary risk over the past three years. Just as FX market considerations likely influenced the June decision, we suspect they will again.
EUR/NOK was trading at 11.40 on 18 June when Norges Bank delivered a cut that was entirely unpriced. The resulting NOK sell-off was significant. Today, after a not-usual roller-coaster ride, EUR/NOK sits at 11.60 – but crucially, markets are already pricing in 17bp of easing for this meeting. That means the negative impact of a cut on NOK would likely be more muted, especially if policymakers accompany it with cautious forward guidance for December and beyond.
Given the unpredictable nature of external drivers for NOK, failing to cut during a rally could be a missed opportunity.
Importantly, rates remain restrictive at 4.25%. Using core CPI as the benchmark (rather than the less-regarded headline rate), a hold would leave Norway with the highest real policy rate in the G10 – assuming the Fed delivers a widely expected 25bp cut next week.