October 6, 2022

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Economists expect big rate hikes next week: - There will be huge costs across the board

Economists expect big rate hikes next week: – There will be huge costs across the board

Inflation has stabilized at high levels in many countries, and so there is tension associated with interest rate meetings at a number of central banks next week.

In the United States, Norway and a number of other countries, significant rate hikes are expected this week.

A few weeks ago, markets were divided over whether the US central bank would raise interest rates by 0.5 or 0.75 percentage points. With only a few days left until the decision is announced, a guaranteed increase of at least 0.75 percentage points – and a certain chance of a 1.0 percentage point increase – is priced.

Chief Economist Sarah Midtgaard at Handelsbanken believes that the shift in expectations is mainly due to two things:

Several Federal Reserve representatives discussed interest rate expectations, and said their work was not done yet. In addition, inflation numbers came in higher than expected, and the Fed has been clear that it depends on the key numbers that come in.

Total inflation came on an annual basis for the month of August 8.3 percentversus the expected 8.1%. This may be a wake-up call for the market, after somewhat lower inflation in July was a positive surprise that could give hope that pressure was easing.

If the rate hike ends by a full percentage point, it will be a small shock that could send the stock markets down, believes Midtgaard, who notes that there is only a 20-30% chance that this scenario will take place.

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The chief economist believes that there are clear indications that there will be a relatively hard landing for the US economy, after the Federal Reserve made it clear that the most important thing is to reduce inflation. Obviously, this means higher interest rates and lower growth.

The Fed is not in the habit of giving clear guidance on the rate path, but Midtgaard says you can follow average forecasts for further development of the key rate. If the Fed reduces the pace of rate hikes from the next rate meeting in November, the starting level this year will end at 3.9 percent, up significantly from 3.4 percent, which was the median expectations of members in June.

– It is an indication that the interest rate is rising more sharply, and will remain at a higher level for a longer period of time. She says this is a clear trend among many central banks, that it is taking longer and longer to beat inflation.

– Still a big problem

Magnussen, chief economist at DNB Markets, calls it a “rather fierce run” if the Federal Reserve meets its expectations of a 0.75 percentage point rate hike — the third time in a row.

Chief Economist Knut A. Magnussen at DNB Markets.

Chief Economist Knut A. Magnussen at DNB Markets. (Photo: Michaela Berg)

The inflation picture is still very problematic for the Fed, but in addition to that, there has been very high wage growth since the last interest rate meeting. Many of the higher increases in November and December, respectively, are priced 0.75 and 0.5 percentage points, than they were before the inflation figures were released, he says.

Magnussen says you can watch if the Fed comes up with news at the press conference after the rate meeting, as the market will be on the lookout for signs of smaller increases than what is currently priced.

Waiting for the upwardly adjusted interest rate path

When Norges Bank makes its rate announcement on Thursday, Handelsbanken expects a rate increase of 0.5 percentage point – in line with the consensus.

– 0.75 should not be completely left out which is partially priced. In any case, we imagine Norges Bank will adjust the rate path upwards. There, it previously announced a 2.25 percent policy rate at the end of the year, but there’s a chance we’ll get three percent, says Midgard.

And remember that Norges Bank should take into account that all kinds of interest rate shocks affect Norway to a greater extent than most other countries, because Norwegians have a lot of loans with floating rates in the first place.

In comparison, the US Federal Reserve will have to act even harder for an increase in interest rates to have an effect. Where the market rates peak interest rates in Norway at 3.5 percent next summer, they are expected to reach more than four percent in the United States.

The neutral interest rate is 1.75 percent.

Midtgaard believes that the peak interest rates may end quickly at 3.25 percent next summer, but does not rule out that the peak will come before the summer, because central banks are starting to have difficulty bringing down inflation after an unusually fast transition. Low interest rates for overheated economies.

“It’s going to be very steep up front now, and solid food across the board,” she says.

Magnussen at DNB Markets also expects, like most others, that Norges will raise rates by 0.5 percentage point.

What is more interesting is what the future interest rate path will indicate. The network’s report last week gave the impression that there is a weaker development in the business world and that it is expected to become weaker in the future. This may indicate that Norges Bank will be more cautious, he says.

Magnussen expects two 0.25 percentage point increases later this year, which will be the last in this round.

The housing market is not the main priority

Neither Midtgaard nor Magnussen think Norges Bank is paying much attention to the downturn in the housing market.

In its previous monetary policy report, the Bank of Norway predicted house prices would fall by one percent in 2023.

– You may want to adjust to a slightly larger drop, but house prices will likely drop more than 10 percent for Norges Bank to be particularly concerned about, Midtgaard says.

She does not believe that the interest rate will be used to stem a potentially large decline in home prices, but other measures such as changes in countercyclical buffer capital or mortgage regulations are more relevant.

We are at a point where interest rates may eventually start to affect the housing markets, but I don’t think that will be very decisive for what central banks will do with regard to interest rates in the future. Magnussen says one should expect a certain calm in the housing market as a result of the fight against high inflation and a tight labor market with wage pressures.(Conditions)Copyright Dagens Næringsliv AS and/or our suppliers. We would like you to share our cases using links that lead directly to our pages. All or part of the Content may not be copied or otherwise used with written permission or as permitted by law. For additional terms look here.