As expected from Norges Bank

Norges Banks lifted the signal rate as expected and indicated that there is more to come. Market rea

(13.05.2011) Norges Banks lifted the signal rate as expected and indicated that there is more to come. Market reactions were muted. Today the revised budget for 2011 is due.

By Knut A. Magnussen, Senior Economist at DNB Markets

The sight deposit rate was, as expected, lifted by 25 bp. to 2.25% yesterday. This was the first move since May 2010, when a similar hike was undertaken. The rate has been lifted only 1%-point from the trough. The central bank refers to low unemployment and increasing wage as main arguments behind the hike. According to Governor Olsen, the labour market tightness is more evident now than at the previous meeting in March.

In addition the fact that ECB and Riksbanken have both lifted rates is important. On the other hand low inflation and the strong NOK call for a gradual tightening. Olsen also revealed that there will only be 6 rate meetings per year from 2012 onwards. This is the same frequency as Rikbanken, whereas ECB and Bank of England by comparison have meetings 12 times a year.

We think 6 meeting are sufficient in “normal” times, but may be to few during crisis. We think that the next hike will take place in September this year, but the rate path will be adjusted at the upcoming meeting 22 June.

Today the revised National budget for 2011 will be presented.
Oil revenues will obviously be revised higher and with the local elections coming in September, it will be interesting to see to which extent the government will maintain the slightly tightening profile form the October budget.

In China the reserve requirements for banks were hiked once again yesterday. As usual the hike was 50 bp. and the level for the larger banks is now 21%. This is the eight hikes since the tightening process started and recently there has been a hike every month. The hike must be seen in the light of still high inflation (5.3% in April) and that activity is still growing strongly. However, it seems as both activity and inflation is about to slow somewhat. Hence the tightening may also slow a bit going forward.

US retail sales grew by 0.5% in April and a bit more when cars sales were excluded. As expected sales of petrol rose lifted overall sales and grew by 2.7%. Hence the underlying trend was rather weak even if the March data was revised up somewhat. Furthermore higher inflation probably implies that real sales only grew marginally. Inflation, due today, is expected to have increased by 0.4% from March to April. Initial claims fell as expected a lot last week to 434.000, which indicates that the strong increase the week before was a fluke.

Industrial production in the euro-zone fell by 0.2% in March. This was a disappointment and only Germany, Portugal and Italy registered a rise this month. Q1 ended with a meagre 1% growth, far below the pace in Q4. Nevertheless it is expected that GDP will grow more strongly in Q1 (data out today) than in the previous quarter. The EURUSD seems to be stabilizing somewhat and is this morning trading at round 1.42.

UK industrial production rose by 0.3% in March. This was also weaker than expected. The increase in Q1 ended at around 1%, similar to Q4. Hence it seems as the relatively strong development for the UK manufacturing sector is continuing. On the other hand weaker business confidence points at weaker growth going forward.

Swedish inflation rose exactly as expected in April. Headline inflation rose to 3.3% while CPIF (ie exclusive of mortgage rate effects) rose from 1.5% to 1.8%. Higher inflation implies that the signal rate will be hiked further, even if core inflation is still somewhat lower than the target. The SEK was not affected by the release and EURSEK has been fairly stable somewhat below since yesterday morning.