Rate Cut By Norway's Central Bank Isn't That Surprising, Says ING

08:15 AM EDT, 06/19/2025 (MT Newswires) -- ING said it agrees with the market consensus calling for a hold by Norges Bank at Thursday's policy meeting.

The bank had previously been major subscriber of a June cut before reluctantly aligning with consensus and pricing last week on the view that Norges Bank didn't want to surprise markets.

However, ING thought holding in June would be a mistake, as the window for easing policy could have shrunk rapidly given that the stability in the krone (NOK) could soon evaporate.

It turns out ING's considerations were shared by Norges Bank policymakers, which delivered a non-consensus 25bps rate reduction to 4.25% on Thursday and signaled it can cut once or twice more this year. The new rate projections have been revised lower in the near term, but interestingly point to a slightly higher terminal rate ahead.

The way the bank interprets this is that growth now plays a bigger role in monetary policy considerations, and argues for some pre-emptive easing.

On inflation, Norges Bank decided to overlook some of the upside volatility in the headline consumer price index and focused on the faster-than-expected decline in underlying inflation to 2.8%. Factoring in the downside risks from global trade tensions, a policy rate at 4.50% did look too restrictive, and taking it below 4.0% by year-end seems entirely reasonable to ING.

The bank expects two more 25bp cuts this year, in August and November. That's because ING thinks Q2 growth may well prove sluggish and underlying inflation should re-stabilize below 3.0%.

Obviously, Middle East tensions and oil price implications and United States trade policy can swing the balance to a more conservative path, with more cuts delayed until next year. But ING believes Norges Bank implicitly admitted on Thursday that it was late in starting its cutting cycle, and the bar to justifying restrictive policy is higher.

In terms of foreign exchange, the bank isn't concerned about excessive NOK depreciation due to Norges Bank. If Sweden serves as an example, rate cuts don't do much lasting damage to a fundamentally undervalued currency in the current environment.

Incidentally, with European Central Bank rates falling below 2.0% in Q3, according to ING estimates, seriously eroding NOK's rate advantage over the euro (EUR) will take quite a lot of cutting.

The bank remains committed to a downward-sloping EUR/NOK profile, with upside risks almost entirely stemming from external factors. A move to 11.00 by year-end remains a tangible possibility.

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