–Norwegian Currency Strength To Play Key Role In Decision

BRUSSELS (MNI) – Economists are divided over whether the Norges
Bank will hike its key policy rate to 2.0% or leave it on hold at 1.75%
after its meeting Wednesday.

The Norges Bank began its hiking cycle last year, increasing rates
to 1.75% from an all-time low of 1.25%, after its economy weathered the
financial crisis better than most.

At its last meeting March 24, the central bank kept the rate on
hold but the accompanying monetary policy report showed a rate increase
before mid-year was likely, implying a hike to 2.0% in either May or
June.

That brings the May meeting into focus. A Bloomberg survey of 16
economists showed that half of them are predicting a hike on Wednesday
and the other half saying the central bank will remain on hold.

Central to the case for postponing the rate hike until the June
meeting is the strength of the Norwegian currency, the krone, which the
central bank’s policymakers are likely to examine closely at their May
meeting.

The trade-weighted Norwegian krone (NOK) is at its strongest level
in several years against the Euro, primarily due to the euro’s weakening
on the back of the sovereign debt crisis in the Eurozone.

“NOK strength increases the risk that our call for a 25 basis point
hike next Wednesday may be postponed until the June meeting,” said Kevin
Daly, an economist at Goldman Sachs.

“Norges Bank expressed concerns about the currency when it reached
these levels just before the first hike in October. It has been
expecting the currency to weaken gradually, even as it has ground
higher,” Daly said.

However, Goldman Sachs is sticking to its forecast of a hike
Wednesday to 1.75%, saying that while a postponement of the May rate
hike until June has become more likely, it is still not the central
scenario.

Economists at SEK in Stockholm said the recent data increased the
likelihood that the central bank would leave the key rate on hold, but
stressed that it was a very close call.

Data released last week added support to the case for leaving rates
on hold, the SEK economists said, with retail sales coming in weaker
than expected and an activity and employment report in line with the
Norges Bank’s outlook.

“We tilt slightly in favour of a 25-basis-point rate hike to 2.0%
at the monetary policy meeting on 5 May. It is a close call, a view
shared by markets,” said Tina Mortensen, an economist at Citi said in a
note to investors.

“If not May, then a June rate hike is likely,” she said.

–Brussels: 0032 487 (0) 32 803 665, echarlton@marketnews.com

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