Economists believe the highest inflation rate in 13 years likely won’t hamper consumption growth, which Norges Bank is counting on for another rate hike.
Total inflation (inflation) rose to 5.1 percent in November, the highest in 13 years. The question is whether it limits purchasing power enough to prevent interest rates from rising.
– Currently, it’s pretty well torn in people’s real disposable income, says Nordea Markets chief economist Kjetil Olsen for E24.
He still thinks it doesn’t mean much to the Norges Bank in the current situation.
In September, Norges Bank raised interest rates for the first time during the pandemic and announced no later than November that the rate was likely to rise from the current 0.25 percent to 0.5 percent at the December 16 meeting.
Economists, who until recently were skeptical, began last week to suspect the worsening of the pandemic.
Inflation rate rises to a maximum of 13 years
Believe in raising interest rates next week
The Bank of Norway primarily considers so-called core inflation (excluding electricity and energy) when setting interest rates. This also rose more than expected in November, with an increase of 1.3 percent year-on-year, against the Bank of Norway’s estimate of 1.1 percent. It’s still below the 2 percent target over time.
However, the overall increase in price affects the amount actually left in your wallet, and therefore how much you spend. Consumption growth is an important driver of the Norwegian economy and a prerequisite for recovery after the pandemic.
The latest forecast from the Bank of Norway estimates a relatively high growth in private consumption of 9.6 percent next year.
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Hopefully, the electricity price shock will be short-lived and therefore doesn’t contribute much to lowering the cost of living if you look at the big picture, says the Nordea economist.
He believes it could reduce purchasing power by a few tenths of a percentage point this year and next.
– Olsen says it’s not too much and it doesn’t rip bones during the Norges Bank consuming process.
He still thinks interest rates will rise next week, but he wouldn’t be surprised if they wait until March.
Omicron is more important than electricity prices
Olsen sees the Omicron infection as a much bigger factor to the Norwegian economy than electricity prices.
“There are subsidy schemes, so a large part of the electricity price hike is taken away, and that will make the electricity price shock suddenly seem more confusing,” he says.
The chief economist further points out that apart from the omikron, all factors point in the direction of higher interest rates.
– Had it not been for Omicron, the interest rate path to the Norges Bank would have been significantly higher. The question is how much it destroys the public image.
He believes that a lot will be done if we get a third dose of the vaccine in the population, and that we will then have “full work” again towards Easter.
The economy recovers surprisingly quickly when the fear recedes and the authorities open everything up again.
The main scenario for Nordea is a rate hike next week, but Olsen is uncertain, as the decision will be more emotionally dependent this time around.
– They can raise rates now and look at. If the economy is doing really badly, they could instead cut back on further increases in March, he says.
If they wait for a hike, they risk sitting with an interest rate of 0.25 percent while price and wage growth rises exponentially. Then they will be more on their hind legs.
It also indicates that the market is still pricing in the high probability of a rate hike next week. By waiting, Norges Bank risks causing “more turmoil” in the market, with the krone weaker and market interest rates lower than if they had gone up, he believes.
We hope the Norges Bank has learned that facing a pandemic with low interest rates is not an obvious tool to use. He may give a small boost, but people don’t spend the money anyway, so more compensation plans may be needed.
Safe with high interest rates
Kjersti Haugland, chief economist at DNB Markets, believes in a hike next week, but he also envisions a slight hike at peak interest rates. In September, the central bank estimated a peak of 1.75 percent at the end of 2024.
– This is partly because the Norwegian economy has developed strongly this fall, and pressure trends are evident, among other things in the form of a labor shortage, she wrote to E24.
It also sees indications that core inflation will rise more than the Norges Bank has envisioned so far, due to higher prices for intermediate goods and freight to consumers, and because there are prospects for higher wage growth next year.
High inflation is one factor contributing to higher wage demand, and because of austerity in the labor market, employees have more bargaining power over a period, she says.
Erica Dalstow, chief strategist at SEB, wrote in an analysis that core inflation (core inflation) has bottomed and will rise next year.
Dalstø also notes that future market prices suggest that overall inflation may rise further in December, and that in an interim period it could be as high as 7 percent.
The Norges Bank is focusing on core inflation, but higher electricity prices are putting pressure on household purchasing power and will affect growth in the short term, she wrote.
Like Nordea Markets and DNB Markets, SEB also expects to raise interest rates next week.
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