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Investment Research
19 March 2015
Norges Bank Review
NB cut postponed to June – EUR/NOK to fall medium-term

Norges Bank surprised markets significantly by not cutting rates today. Norges
Bank did lower the rate path indicating a single rate cut (in June).

We expect a single 25bp rate cut in June but that NB will leave rates unchanged
thereafter.

Markets are pricing in two full 25bp rate cuts: one in June 2015 and another in
December 2015. We consequently expect a long-run re-pricing of Norges Bank to
play out.

FX: In the short-term we expect the downside risk to the oil price to limit the
upside potential in the NOK. Our fundamental bullish view of the NOK,
however, is unchanged. We lower our 1M target to 8.65 (previously 8.75) but
maintain our 3M, 6M and 12M forecasts of 8.50, 8.25 and 8.15, respectively.

Fixed Income: We still see value in being long 10Y NGB versus Bunds especially as we are getting close to the lower bound in Bunds.
Downward adjustment of the rate path
Norges Bank still expects a stronger
NOK
Norges Bank arguments for new rate
path
Source: Norges Bank, Danske Bank Markets
Source: Norges Bank, Danske Bank Markets
Source: Norges Bank, Danske Bank Markets
NB kept rates unchanged but kept its easing bias by indicating a rate cut in June, with a
probability (30-40%) for a cut in May. Further out, the interest rate path indicates
unchanged rates at 1% throughout 2017. Clearly, our risk scenario was triggered: other
key figures support our view that the Regional survey underestimates growth and the
acceleration in housing prices is a concern. NB kept the 2015 growth forecast at 1.5 %,
and still expects the import-weighted NOK to appreciate 3-4 % in 2015. As we expected
the economy to weaken roughly in line with the forecast in the MPR, we now expect NB
to cut rates by 25bp in June.
NB acknowledges that the key economic indicators have been rather mixed. There is no
doubt that growth is abating, but there are no indications of a severe downturn. The drop
in oil prices has resulted in a sharp drop in activity in the oil related sectors. However,
this is counteracted by a lift in export industries on the back of a weaker NOK and
stronger global growth. In addition, lower interest rates are lending support to both
private consumption and housing demand. The latter is gradually improving residential
construction. Finally, as fiscal policy is completely sheltered from the drop in oil prices
due to the Petroleum Fund mechanism, fiscal expansion carries on as well. As a result, the
labour market is holding up pretty well and the rise in unemployment has been moderate.
Important disclosures and certifications are contained from page 4 of this report.
Chief Economist, Norway
Frank Jullum
+47 85 40 65 40
fju@danskebank.com
Analyst
Kristoffer Lomholt
+45 45 12 85 29
klom@danskebank.dk
Chief analyst, Head of Fixed Income Research
Arne Lohmann Rasmussen
+45 45 12 85 32
arr@danskebank.dk
www.danskeresearch.com
Norges Bank Review
NB stressed that the overall wage growth in 2014 ended up weaker than forecast at 3.1%.
At the same time, the signals from the labour market organisations point to moderation in
the central wage negotiations next month. Hence, wage growth is expected to be lower.
On other central banks, governor Olsen pointed out that some have moved to negative
rates. This will of course affect the rate setting and the interest rate path at Norges Bank.
However, this is incorporated in the new rate path, and the effect on NOK-rates is
documented in the report.
The import-weighted NOK is a lot weaker than NB assumed in December. So far in Q1,
the NOK has been 2.9% weaker than this assumption. This is pulling the rate path
upwards, partly counteracting the effects described above.
Since the publication of the December MPR, the oil price has dropped from USD70 to
USD45 per barrel, but has recently stabilised at around USD55. This, of course, adds
downside risk to the economy and hence the inflation outlook and interest rates.
However, the February oil investment supported the December forecast, that oil
investments will drop c.15 % in 2015. Hence, the oil price and the oil investments played
a less important role for the rate decision and the rate path than the market seemed to
believe.
FX and fixed implications and outlook
While we in Norges Bank Preview argued that the risks were tilted towards Norges Bank
leaving rates unchanged, today’s decision was a huge surprise to market pricing (see
charts below). Consequently it sent EUR/NOK dropping the most since January 2009.
The big question remains how this influences the outlook for the Norwegian currency
going forward.
Market pricing at 09.45
1.40%
1.25%
Market pricing at 11.00
1.40%
1.25%
Norges Bank Pricing*
1.20%
1.20%
1.00%
1.00%
0.80%
-68
-69
-70
-69
0.40%
0.20%
0.20%
Jun15
*Approx. from stripped FRAs /
Source: Danske Bank Markets
-44
-46
-48
-49
Sep15
Dec15
Mar16
Jun16
0.60%
0.40%
0.00%
Mar15
-31
0.80%
-57
0.60%
Norges Bank Pricing*
Sep15
Dec15
Mar16
Jun16
indicate Norges Bank's planned rate decisions in 2015
0.00%
Mar15
Jun15
*Approx. from stripped FRAs /
indicate Norges Bank's planned rate decisions in 2015
Source: Danske Bank Markets
Market pricing maintains potential for a stronger NOK
In the short-term the move lower has been very much in line with our FX Short-term
financial model estimates. EUR/NOK remains above our fair value estimate but not
statistic significantly so. We expect Norges Bank to cut rates once by 25bp in the coming
12M: namely at the monetary policy meeting in June. Currently markets price in a 25bp
cut in June and another 25bp cut in 12M. Consequently relative market pricing maintains
potential for a stronger NOK going forward.
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Norges Bank Review
Our STFM suggests a slightly
overvalued EUR/NOK
EUR/NOK ‘fair value estimate’ to drop
to 8.20 by end 2015 on oil price
recovery alone
PPP model estimate suggests that
EUR/NOK remains overvalued
Source: Bloomberg, Danske Bank Markets
Source: Macrobond, Danske Bank Markets
Source: Bloomberg, Danske Bank Markets
EUR/NOK to consolidate short-term, lower medium-term
In the very short-term the very significant movement lower in EUR/NOK together with
the maintained downside risk to the oil price imply that we expect EUR/NOK to
consolidate near-term. The risks have become significantly more balanced after today’s
meeting in the coming month and we revise lower our 1M EUR/NOK forecasts to 8.65
from 8.75 previously.
We maintain our medium-term bullish view on the NOK and we leave our medium to
long-run forecast unchanged. We have long argued that the NOK from a fundamental
perspective is cheap, which is also reflected in our longer-term forecasts. Our
expectations of a gradual oil price recovery this year and our view that the Norwegian
economy will hold up relatively well against the oil price collapse is supporting this
fundamental view in 2015. Interest-rate derivative markets price in more than the 25bp
rate cut that Norges Bank has presented and we believe that a re-pricing of Norges Bank,
a gradual oil price recovery and ECB QE will drag the cross lower.
We target EUR/NOK at 8.50 in 3M, 8.25 in 6M and 8.15 in 12M.
EUR/NOK to move higher short term and lower in the long term
9.75
EUR/NOK
9.50
9.25
9.00
8.75
8.50
8.25
8.00
7.75
Mar-14
Jun-14
75% conf. int.
EUR/NOK
Oct-14
50% conf.int.
Jan-15
Apr-15
Forward
k
Aug-15
Danske fcst
Nov-15
Feb-16
Consensus fcst
1M
3M
6M
12M
Forecast (pct'ile)
8.65 (56%)
8.50 (40%)
8.25 (23%)
8.15 (25%)
Fwd. / Consensus
8.64 / 8.74
8.66 / 8.71
8.69 / 8.59
8.73 / 8.41
50% confidence int.
8.41 / 8.82
8.34 / 8.91
8.26 / 8.99
8.15 / 9.12
75% confidence int.
8.29 / 9.01
8.16 / 9.17
8.04 / 9.34
7.84 / 9.62
Source: Bloomberg, Danske Bank Markets
Fixed income
Today’s interest rate decision was a set-back for our bullish view on Norway’s fixedincome markets. However, forward guidance suggests that Norges Bank is poised for rate
cuts. Hence, we stick to our trade recommendation to be long 10Y NGB versus Bunds –
as we still like the trade especially as we are getting close to the lower bound in Bunds.
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Norges Bank Review
Disclosures
This research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S (‘Danske
Bank’). The authors of this research report are Frank Jullum, Chief Economist Norway, Arne Lohmann
Rasmussen, Chief analyst, Head of Fixed Income Research, and Kristoffer Lomholt, Analyst.
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