EUR/NOK: Krone to strengthen moderately as lower inflation will not rock Norges Bank – Nordea

The Norwegian krone weakened today due to a lower-than-expected core inflation. It is likely that foreign hedge funds and short-term speculators are behind the moves, fearing that lower inflation will prevent Norges Bank from raising rates. But their view is wrong, in the opinion of economists at Nordea.

The economy has been sending clear signals that it is normalising quickly

“Bear in mind that Norges Bank has a flexible inflation rate target. The policy rate is set with a view to stabilising inflation at the target around 2% in the medium term, not the short term.”

“Last year inflation was well above the 2% target, this year it will end up below it. Over time, core inflation will likely converge towards the 2% in the years to come.”

“Now the economy is sending clear signals that it is normalising quickly according to the latest unemployment figures and Regional Network survey. These are the signs Norges Bank was looking for that would allow them to normalise the rate level. This is why the lower unemployment and strong Regional Network will be much more important for Norges Bank than core inflation when they decide what signals to send at next week’s meeting. We believe the message will be that the first hike will come in September, assuming everything goes according to plan with the vaccine campaign.”