Norges Bank kept its key rates unchanged at 1.50% as expected. The rate forecast was revised up from the March report, but to a much smaller extent than what we had expected. There is one hike next year in the path, most likely in the summer. At the most, the rate path was revised up by 23 bp (Q2 2014). The main surprise is that Norges Bank has turned much more pessimistic on growth/capacity utilization and the outlook for the domestic economy. Bottom line is that the recent signs of weakness has had a much stronger impact on Norges Bank view on the economy looking ahead. Weaker NOK, higher inflation and higher rates abroad pulled up as expected. The market reaction is marginally lower rates in the front end with flattening of the curve out to 5 years. The market went into the meeting priced for the first hike in the summer and this is also what Norges Bank indicated at the press conference so one should not expect the first FRA contracts to adjust much. But when Norges Bank indicates a first hike in 9 months time and also is vague on the timing, it is obvous that we should interpret them as being on hold. This is not a promise of a hike, the next rate change is 100% data dependant. As such it is no surprise that we are seeing the first part of the swap curve flatten. The market had start to push butterflies such as 2s5s10s significantly into positive territory, something with is a clear sign that the market is starting to look for a tightening bias from the central bank. The lack of this is where the big disappointment was. 2s5s10s is still trading at 15bp. We consider this too high for a market where the central bank is on hold and it needs positive data surprises not to fall further. The market and Norges Bank Norges Banks previous and new interest rate forecast: Norges Banks previous and new projections on CPI-ATE: Norges Banks previous and new projected output gap: Norges Banks previous and new forecast of I-44: Factors behind changes in the interest rate forecast:
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