Norway’s underlying inflation unexpectedly accelerated to a record-high pace last month, cementing expectations that the central bank will prolong its interest rate-hiking campaign beyond the summer.
The pace of core inflation, the measure followed by Norges Bank, rose 6.7% in May from a year earlier, compared with the 6.3% forecast by analysts in a Bloomberg survey and a central bank’s estimate of 6%. The headline inflation rate also increased, defying forecasts of slowdown.
The data compounds the challenges faced by the Norwegian households — the world’s most indebted — and the nation’s policymakers who have been caught out by a weaker-than-expected krone which fuels imported price growth. It will likely boost bets that Norges Bank will flag more rate hikes after one expected later in June from the current level of 3.25%, with some forecasters seeing chances of a rate peak exceeding 4% later this year.
“After this figure, the risk that Norges Bank will have to raise rates above 4% has risen sharply and even the possibility for a 50bp rate hike cannot fully be excluded at the June meeting,” Nordea Bank Abp’s analysts Dane Cekov and Kjetil Olsen said in a note to clients. “For now, we hold our view for a 25bp rate hike in June.”
Investors now price a total of 83 basis points of additional hikes from Norges Bank, including 30 basis points for the forthcoming June meeting, 25 basis points for August and 22 basis points for September, according to Danske Bank A/S’s economist Frank Jullum.
The krone gained 0.7% to 11.6718 versus the euro at 8:42 a.m. in Oslo. It has been the biggest decliner this year versus both the dollar and the euro among the G-10 group of the world’s largest currencies.
The International Monetary Fund said on Thursday there are upside risks to Norwegian inflation, urging the government to refrain from fueling the price pressure caused by higher budget spending. That’s after the Labor-led cabinet said last month it would raise spending of its $1.4 trillion sovereign wealth fund, boosting the mainland economy by as much as 0.4 percentage points.
The 12-month price increases were driven mainly by costs of flights, food and rents, while the price growth on imported goods also remains high, likely helped by the weak krone, the statistics office said. Earlier on Friday, it released new forecasts showing core inflation will accelerate to 6% this year, compared with the previous forecast of 5.4%, while it expects the benchmark rate to peak at 3.75%.
“With the magnitude of this surprise it seems fair for markets to almost fully price a third 25bp hike in September now,” said Kristoffer Kjaer Lomholt, Danske’s head of FX research in Copenhagen. “We still think the bar is high for Norges Bank to revert to 50bp hikes given how inflation expectations are more stable.”
--With assistance from Joel Rinneby.
(Updates with krone reaction, analyst comments from fifth paragraph.)
