Norges Bank expected to cut rates twice more in 2025

Norges Bank unexpectedly cut its policy rate by 25 basis points to 4.25% last week, driven by a more benign inflation outlook, a move that surprised most economists. A Reuters poll now forecasts two additional cuts this year, with 23 of 24 analysts expecting a September reduction to 4.00% and 18 anticipating 3.75% by year-end. This potential aggressive easing, contrasting with other Western central banks' approaches, is underpinned by core inflation easing to 2.8% year-on-year, though some analysts, like DNB Carnegie, caution on the predictability of future inflation prints given recent volatility.

Analysis

Norges Bank has executed a significant dovish pivot, surprising markets with a 25 basis point rate cut to 4.25%, a move driven by a more benign inflation outlook. This decision was catalyzed by core inflation in April and May easing more than anticipated, falling to 2.8% year-on-year, which is below the central bank's own 3.1% forecast but still exceeds the 2.0% target. Consequently, market expectations have shifted aggressively, with a strong consensus of economists in a Reuters poll now forecasting two further cuts by year-end to 3.75%, a more rapid easing path than the 4.00% previously anticipated. This policy shift marks a departure from Norway's recent hawkish stance relative to other Western central banks. However, there are notes of caution from market participants; DNB Carnegie has flagged the risk that the central bank is over-relying on just two months of volatile inflation data, while Nordea Markets projects only one further cut, arguing that a rapid succession of three cuts would provide an overly strong stimulus to the economy.

Key Decisions for Investors

• Given the surprise dovish turn and consensus forecast for two more rate cuts, investors should consider positioning for potential near-term weakness in the Norwegian Krone (NOK) against currencies of more hawkish central banks.
• The market's repricing towards a 3.75% year-end policy rate suggests that Norwegian fixed income instruments could see further price appreciation, making duration exposure a key consideration.
• Closely monitor upcoming Norwegian inflation data, as a reversal or persistent stickiness could challenge the market's aggressive rate-cut pricing and introduce significant volatility, validating concerns raised by analysts about the limited data driving the policy shift.
• The prospect of rapid monetary easing is a potential tailwind for Norwegian domestic equities, especially in rate-sensitive sectors, but this should be weighed against the underlying economic cooling that is prompting the central bank's action.