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Investing.com -- Bank of America (BofA) analysts have indicated that the decision for the Norwegian Krona (NOK) Norges Bank’s March meeting on interest rates has become increasingly difficult to predict following recent economic data.
BofA sees slight upside risks for NOK heading into the Norges Bank meeting. The recent domestic data has been hawkish, although the market has already priced in a small probability of a rate cut next week and approximately 1.5 cuts for the year.
BofA forecasts EUR/NOK at 11.00 and USD/NOK at 9.57 by the end of the year, noting that the NOK could continue to benefit from positive developments in Europe, albeit potentially less so compared to the Swedish Krona (SEK). The analysts also anticipate new downside potential for the NOK-SEK exchange rate in the first half of the year.
Initially, a rate cut by Norway’s central bank seemed certain, but the situation changed with the release of high inflation numbers for February and the findings of this week’s Regional Networks Survey (RNS).
BofA analysts have taken a detailed look at the Norwegian economic indicators and believe that there are strong arguments both for and against adjusting the interest rate. Factors suggesting the bank may hold rates include the surprise inflation jump in February, positive results from the first-quarter RNS survey, robust wage growth, a resilient labor market, and rising house prices.
On the other hand, reasons supporting a rate cut include the bank’s previous guidance, disappointing GDP growth projections for 2024, especially in the fourth quarter, expectations for inflation normalization, and a stronger Norwegian Krone (NOK) coupled with lower oil prices.
The recent RNS, which reported stronger output numbers last Thursday, has seemingly weakened the argument for a rate cut this month, particularly the concern over weaker growth data in the fourth quarter of 2024.
Although there was a slight dovish shift in wage growth expectations, the RNS data was collected before the February inflation surprise. As a result, BofA now considers a rate hold to be slightly more probable than a cut.
BofA also anticipates an upward revision of the interest rate path by Norges Bank, irrespective of the March decision. While BofA’s initial base case forecasted three rate cuts in 2023, this is now deemed unlikely.
In the event of a rate hold, the bank is expected to indicate between one and two cuts for the remainder of the year, with September and December being tentative months, though June remains a possibility. Conversely, if there is a hawkish rate cut next week, BofA expects Norges Bank to suggest a chance of one more cut by the end of the year.
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