The Riksbank minutes from the 8th April monetary policy meeting had a soft tone; slightly softer than we expected. The repo rate was left unchanged at 0.75% while the rate path clearly signaled a rate cut in July. The easing bias is confirmed by the minutes, which indicate that Riksbank had considered cutting rates in April. The meeting was characterized by the fact that the Riksbank is still under pressure by low inflation and low cost pressures. The inflation outlook and the credibility regarding the 2% inflation target were discussed thoroughly at the meeting, as expected.
Our outlook of a rate cut for July’s meeting was confirmed when Riksbank’s Deputy Governor, Per Jansson emphasized that “even minor revisions to the inflation forecast could affect their view of monetary policy”. This statement is important due to the surprisingly low inflation reading in March; published two days after the meeting. The CPIF-inflation came out flat during the course of the year, a full 0.3% point below Riksbank’s forecast. Jansson reiterated that he will not advocate a rate hike until CPIF-inflation is above 1.5%. If the April - May inflation figure comes in significantly lower than Riksbank’s forecast, a July cut should be a done deal and a second repo rate cut can no longer be ruled out.
Norway’s economy expanded in the first quarter as rising consumer spending offset a decline in investments and a weaker oil industry. Seasonally adjusted GDP, which excludes oil, gas and shipping rose 0.5 percent, after growing a revised 0.5 percent the prior three months. Moreover, the total output grew 0.3 percent, compared with an estimate for a 1 percent growth.
Consumer spending rose 0.8 percent during the quarter, while investment fell 1.8 percent. Exports rose 1.6 percent and imports declined 2.6 percent. Petroleum and shipping dropped 0.2 percent and final domestic use of goods and services fell 1.2 percent. In addition, consumers are sustaining an expansion in Scandinavia’s richest economy per capita after home prices recovered from declines in 2013. An 8 percent weakening of the krone versus the euro over the past year has also helped exporters.
We expect inflation to hold at present levels for the next six months. Although the import-weighted krone exchange rate (I-44) has begun to strengthen, it generally takes time for imported inflation to fall back. We therefore expect import prices to continue to climb through to the summer, helping keep overall core inflation in the region of 2.5%. This view is also supported by prices for consumer goods at importer level climbing 10% y/y.