DNB economists think policy rate will rise to 4.0 percent after summer: – Weak krone is here to stay

DNB economists think policy rate will rise to 4.0 percent after summer: – Weak krone is here to stay

On Thursday morning, brokerage DNB Markets released four major reports, with forecasts for everything from the global economy to the Norwegian krone, the Norwegian housing market and the Bank of Norway’s key interest rate.

The krone weakness and its possible causes that are too much discussed to be given a separate analysis, have been highlighted for the first time in such an anticipated release from a brokerage house.

DNB Markets concludes that within a year one euro will cost 12 NOK, and Kjersti Haugland, chief economist at the brokerage house, notes that “the krone depreciation remains.”

– We believe that the krone is on its way to a new level of steady growth, but it is difficult to say. We don’t envision the krone continuing to weaken permanently, but it will find a level where it stabilizes, she says.

No more competitive advantage

She and the rest of the macroeconomists at DNB Markets have long considered the krone to be in “structural change”.

– In the past, investment in Norway has stood out, among others, due to higher and more stable growth than many similar countries, due to the oil and gas sector. Plus, we’ve consistently had higher interest rates, says Hoagland.

Investing money in Norway has become relatively more attractive to foreign investors than in other small countries, and this has increased demand for the krone – and helped boost the krone’s exchange rate.

We are now in the process of becoming a more like economy. Fair enough with very strong government finances, but underlying growth is no higher than in other countries. And Hoagland says there is no interest rate differential in Norway’s favor either.

Because Norway also features a population with so much debt that is essentially floating rates, some investors are skeptical that Norges Bank has room to correct the interest rate much more, Haugland asserts.

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– Therefore, we believe that Norway will be “avoided” by investors in the future, since the inflow of investor capital from abroad is no higher than in other similar countries.

She said the data did not indicate “in any way” that foreign investors are fleeing Norway. The percentage of foreign owners on the Oslo Stock Exchange and on the Norwegian government bond markets is stable, at 60 percent.

It gives a higher peak rate of interest

In any case, the weakness of the krone has high and low consequences for the Norwegian economy.

The macroeconomists at DNB Markets perform the calculations and run the models for these forecast releases three times a year.

The last time was in January, but compared to then, the brokerage has now revised its estimates for both price and wage growth – partly due to the depreciation of the krone.

Moreover, DNB Markets is raising Norges Bank’s prime rate estimate significantly.

Where in January the broker estimated an interest rate peak of 3.25 percent in the summer, which was set to remain at that level until the first rate cut in 2024, DNB Markets now believes in a four percent interest rate hike in the fall, and that the rate The interest will remain there until the end of 2024.

The main interest rate is currently at 3.0 percent, and was last raised in March. Then Norges Bank came up with an estimate of a peak interest rate of 3.5 percent in the fall, maybe 3.75 percent as well.

Economists believe that wage and price growth will be higher than Norges Bank itself estimated, in part because they assume that the krone will weaken more than Norges Bank assumed.

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– With the outcome of the wage adjustment, with fairly large central add-ons and limited space for local add-ons, we think the wage framework will be blown and you will see a pay increase of 5.5 per cent, says Hoagland.

5% inflation in 2023

The combination of higher-than-previously-expected wage growth, and a weaker-than-expected krone, further explains DNB Markets’ belief that inflation will be higher than expected in January:

We now expect consumer prices to rise 5 percent from 2022 to 2023, up from our previous estimate of 4.6 percent. Core inflation expectations were revised up by 0.3 percentage points to 5.6 percent, economists write in Norway’s Economic Outlook.

In addition, somewhat larger than expected price increases were seen in the first quarter, which was also cited as a cause.

– We expect moderate inflation during the second half of 2023 until 2024.

higher growth estimates

So far this year, Norway’s economy has done better than it probably feared when energy prices were at their highest levels last fall, interest rates rose at record speed from the central bank, and inflation was the highest in 40 years.

DNB Markets is now raising the growth estimate for the Norwegian economy in 2023 to 1.0 percent, where there will be a slight decline of 0.4 percent from the first quarter to the second quarter, before the Norwegian economy remains flat until the third quarter and then grows in the fourth quarter .

– It’s better than we thought last time, but that’s mainly because of money saved from the pandemic, says Haugland.

Money saved from the pandemic has been used as a shock absorbent explanation for at least a year as to why the Norwegian economy continues to do so well.

– When interest rates began to rise, we learned that this money that was saved was there, and that it was distributed unbalanced as the highest earners were the ones who got the most. Not least because we thought people would save a lot from this extra money that was saved — but we were wrong, says Hoagland.

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However, there is no decline in housing prices

House price forecasts have also been changed by DNB Markets.

Where many forecasters in the fall and winter predicted lower house prices in 2023, including DNB Markets, the estimate now is for a general house price increase of 1 percent in Norway this year.

– With the sharp rise in interest rates we have seen, it was believed that it would lead to a sharper decline in housing prices than we have seen – although most agreed that scarcity on the supply side would mitigate the price decline.

Haugland is clear that the development in the home price market this year must also be seen in light of the fact that lending regulations have been significantly relaxed from the new year, but she adds that the turnaround in the housing market itself came in December.

– The underlying demand is there, people were rightly scared for a while in the fall, but now the housing market is picking up again. Haugland says the supply of the stuff is limited enough that prices won’t continue to drop.(conditions)Copyright Dagens Næringsliv AS and/or our suppliers. We’d like you to share our statuses using links that lead directly to our pages. Reproduction or other use of all or part of the Content may be made only with written permission or as permitted by law. For more terms see here.

Dalila Awolowo

Dalila Awolowo

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