At a time when market expectations of G10 monetary policy are rapidly shifting in the direction of fresh policy easing, Norway is a clear outlier. The Norges Bank hiked the deposit rate by 25bps last week and has alluded to the possibility of further hikes going forward. In our view, the scope to tighten monetary policy is limited.

The central bank has used the relative resilience of economic activity and inflation in the face of intensifying global headwinds as justification for normalising monetary policy. However, Norway’s high degree of trade exposure to the euro area (47% of total exports) and the wider EU (82%) leave the economy vulnerable to persistent sluggish growth across Europe. Similarly, although inflation is running at an above-target 2.5% YoY, Norway imports depend on imports from the euro area (34%) and EU (63%), creating a channel through which regional disinflation could dampen domestic price pressures. Finally, lofty residential property valuations (prices have rallied 30% in real terms over the last decade) and high household debt (100% of GDP) mean that Norges Bank could quickly hit the limit of policy tightening when the housing market cools.

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Source: Bloomberg, Macrobond, Variant Perception