– Composite image – E24

Last year, the central bank worked hard to calm the Norwegian economy. DNB chief economist Kirsty Hoogland believes unemployment will have to rise for Norges Bank to loosen its grip.

Friday’s figures show unemployment in Norway creeping back down slightly to 1.8 per cent, after rising somewhat in August.

Therefore, the labor market in this country is still tight.

A tight labor market makes it difficult for companies to obtain workers. It can help push wages and thus price growth upward.

So this could be bad news for a central bank that wants to calm the economy mainly to combat inflation.

Earlier in September, the Bank of Norway raised its key interest rate to the highest level since November 2008 and announced a higher interest rate for a longer period. The central bank announced that there will be no cuts until early 2025.

For its part, DNB Markets believes that we will get our first rate cut in December 2024.

– I don’t think there is a value that says, “Now the Bank of Norway can lower the interest rate,” but I think that unemployment will reach 2.5 percent and above. After that you can think that the labor market has turned and is already starting to slow down, says chief economist Kjersti Hoogland.

But unemployment is not the only thing that will determine whether the central bank will be able to cut interest rates again, according to Hoagland.

– It’s a complicated picture. She says it is also about price growth, not least what other countries are doing, so that we are not affected by the krone exchange rate.

– Reduces the probability

She gives the example of the Bank of England, which for a while governed according to some set threshold value, and was supposed to keep interest rates low as long as unemployment remained at a certain level.

– This form of judgment has been thrown into the trash, as it does not work just by looking at one number, she says.

At the same time, she believes that unemployment must rise “somewhat” above the current level in order to ease monetary policy.

– This is why it is important to follow closely until the December meeting. Hoagland says the sharp rise in unemployment rates makes an increase less likely.

Inflation is more important

— How much will unemployment rise if Norges Bank cuts interest rates before it estimates them itself?

– It’s not that simple. Norges Bank wants unemployment to be as low as possible, but without wage growth being so high that inflation takes hold, says chief economist Torbjörn Ecka of the municipal sector interest organisation, KS.

Any cut in interest rates will depend on inflation expectations, and is not affected by unemployment alone.

A generally tight labor market can lead to higher wage growth, which in turn is a clear driver of inflation.

If core inflation falls faster towards the target, we will be able to lower the interest rate, according to ICA.

– The central bank must constantly evaluate the entire picture. If we can keep inflation expectations low and close to target, we will be able to lower interest rates.

He also believes that the development of the krone exchange rate is more important than wage growth, which is directly linked to unemployment.

The value of the krone has fluctuated slightly this year, but it is still somewhat weaker at more than 7 percent against the euro than it was at the same time last year. Meanwhile, the krone has appreciated against the euro over the past seven weeks, and is trading at just under NOK 11.30.

It has its origins in the epidemic

According to ICA, there are three basic conditions that underlie the unemployment picture we have now.

– He says: – At present, productivity growth is weak, and sickness absence is high.

Ika believes that all three factors have their origin in the epidemic.

The decline in productivity comes from structural changes in production between industries, due to high unemployment rates in some industries and then they returned again, he says and adds:

– Then you may have had job changes that may not have been favorable for the economy.

When it comes to short-term labor migration, the conditions that reduce unemployment here also apply to the countries they come from, he further explains.

In addition, the weak krone means that wages are worth less for foreigners, says Ekka.