NOK Inflation Surprise Spurs Calls for Tightening as Norwegian Krone Weakens

NOK: Inflation surprise adds to the need for more tightening

We recently published an update of our Norges Bank and NOK calls, which is based on expectations for the central bank to bring rates to 3.75% or potentially even 4.0% in an effort to support the declining Norwegian krone.

This morning, inflation numbers for May were released, and surprised on the upside. Both headline and underlying inflation accelerated to 6.7%, from a 6.4% and 6.3% April level, respectively. While the rate-setting model used by Norges Bank is rather mechanical and includes other factors (like trade-weighted NOK and oil prices), higher inflation may well be due to the substantial weakening of the krone and ultimately suggests there is some urgency to bring rates higher to support NOK.

We still expect EUR/NOK to navigate troubled waters in the near term, but continue to target levels close to 11.00 by the end of the year thanks to NOK's strong fundamentals and our expectations for good sentiment for high-beta European currencies in the second half of the year.