Expected Monetary Policy Path
The expected rate path in the Monetary Policy Report keeps the policy rate unchanged for the rest of the year. It then shows a cautious decline in the coming years. An upside risk is noted, with the rate path possibly showing some probability of a rate rise later this year. This would be linked to higher global rate expectations. Looking back at our 2025 analysis, the expectation for Norges Bank to hold its policy rate was correct for a time, driven by geopolitical uncertainty. However, the upside inflation risk we identified did materialize, pushing the central bank to hike to the current 4.5% level later that year. This hawkish stance has persisted into the first quarter of 2026. With current core inflation stubbornly high at 3.5% and Brent crude prices holding firm around $90 a barrel, the case for an imminent rate cut is weak. This suggests that derivatives pricing in any significant policy easing before the third quarter are likely overvalued. We see continued stability in the front end of the interest rate swap curve.Trading And Risk Implications
The Norwegian krone has also remained weaker than the central bank would prefer, which further complicates any decision to lower rates and risk more imported inflation. This domestic pressure is reinforced by the global environment, where both the Federal Reserve and the ECB are signaling a “higher for longer” rate path. Therefore, traders should be cautious of positioning for NOK weakness based solely on rate differentials widening soon. In the coming weeks, a prudent strategy involves positioning for continued high rates and low volatility in short-term Norwegian interest rates. Selling options that bet on near-term rate cuts, such as paying fixed in front-end swaps, could be advantageous. We believe the market is under-pricing the risk that Norges Bank will hold its policy rate at 4.5% through the summer. Create your live VT Markets account and start trading now.
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