Handelsbanken Capital Markets released a recent economic report, and it’s no fun to read for anyone with loans.
The main message in the report is the longer peak interest rates. There has been much discussion about how high the policy rate should be, 3.75 percent or 4 percent. Since last winter, we had predicted 3.75 percent, when we revised expectations up sharply.
At the same time, we say it will take some time before interest rates are somewhat lowered again. We expect that the interest rate peak of 3.75 percent will continue throughout the next year, and a rate cut can only be possible at the beginning of 2025, chief economist Marius Gönsholt Hoff at Handelsbanken Capital Markets tells Nettavisen.
If these predictions turn out to be correct, mortgage holders will have to rely on interest rates above 5 percent for about two years. Handelsbanken expects two more rate hikes, in June and September respectively.
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Interest rate cuts in the United States have been delayed
Why won’t the interest rate be cut until 2025?
It is somewhat related to expectations of interest rates at the international level. Among other things, we believe that the market has gone too far speculating on rate cuts from the US central bank this year. We don’t think it will cut interest rates until the first quarter of next year, and that the ECB will follow through with the cuts in the next quarter.
– It is possible that the Bank of Norway will be a little late this time as well, and this again refers to the subsequent cuts in Norway, – answers Hof. There is also a certain risk that Norges will have to raise the interest rate to 4 per cent.
Hof believes that the central bank is now facing more trade-offs needed in interest rate policy.
– It has been easy so far, because unemployment is low and the increase in basic prices has been very high. Then it is okay to increase the interest rate.
– But now the economy is starting to slow down, and unemployment is starting to rise. In this case, Norges Bank has to balance production and employment considerations against high price growth. Handelsbanken’s chief economist on interest rates says we’re getting close to a point where we can have enough.
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Price growth is well above target
Hoff and his colleagues expect an overall price increase this year of 5.2 percent and core growth of 5.7 percent. This price increase, corrected for energy price and tax changes, is above the long-term target of 2 percent.
Handelsbanken expects so-called core inflation to remain in the six digits for the next few months, but decline to well below 4 percent next year.
– If the krone does not weaken further, but strengthens a little, as we think, you will reduce imported price inflation. Hoff says the lower interest rate differential versus foreign countries will also help NOK. Today, interest rates in many countries are higher than in Norway.
A recent report from the regional network to the Bank of Norway showed that expectations for future price and wage growth are declining.
The crown causes headaches
But the record weakness of the krone caused problems for the Bank of Norway and for many companies and households. According to Handelsbanken, the weakening of the krone exchange rate we are seeing now is about the same as it was during the oil price drop in 2014.
– There has been a change in trend since 2013. The oil industry’s share of activities on the mainland has fallen from 9 to 5 percent. With prices of $110-115 per barrel, the oil industry was very profitable at the time.
– The oil industry is still an important industry, but the industry makes up a smaller share of the Norwegian economy, says Hoff.
Handelsbanken writes in the report that the krone’s weakness is due to a number of factors, such as the sale of the krone by buying into the oil fund, lower interest rates in Norway than abroad, an uncertain investment climate, and a strengthening euro.
– But selling kroner is a pure exchange that the Bank of Norway makes on behalf of the state. Over time, the use of oil money is important for the currency market. Hoff says. But sales of kroner at Norges Bank can affect the exchange rate. There is not always a synchronization between krona sales and krona purchases by oil companies.
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Employees lost purchasing power last year, and they may do so this year, even with a wage cap of 5.2 percent. The Technical Accounts Committee (TBU), on which the parties depend in their working life, predicted in March that prices would increase from 2022 to 2023 by 4.9 percent. However, in April the annual growth was a whopping 6.4 percent.
Does the estimate of 4.9 percent seem unrealistic?
– We think it’s a little low, but it’s not heaven and earth compared to our estimate of 5.2 percent. When the TBU came to the estimate, the krone exchange rate was stronger, and energy prices fluctuated a lot, Hoff defends.
Handelsbanken believes in an overall wage increase from 2022 to 2023 of 5.4 percent.
There is one thing in particular that worries the bank manager
Interest rates are devastating
Wage growth this year will be high because price inflation was high last year. After the sharp decline in real wages last year, there is scope to increase wage growth this year and balance the income distribution between labor and capital, says Hoff.
He gives a sigh of relief and warns: for those who have loans, total real income growth will be negative anyway. Even if real wages rise slightly, this will be overshadowed by new interest rate increases from the Bank of Norway
– With the rise in interest rates that we now expect, the real income of households will weaken by 1.5 percent.
Handelsbanken devotes a lot of space to the housing market in the report and writes that the decline in housing is delayed. So far, Norwegian house prices seem immune to higher interest rates from Norges Bank. They will not be in the future, now prices can drop.
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I did not expect the interest rates to rise
– This is again related to our opinion on interest rates. Interest rates are likely to rise more than expected in the housing market at the beginning of the year. Then there was talk that peak interest rates could be reached, and that the government had relaxed lending regulations.
“It gave an extra stimulus to the housing market initially, but we think we first have to see that a peak in interest rates has been reached before we can say a house price has been reached,” says Hoff. But there will be no collapse in the housing sector, and projections are for an average decline from 2022 to 2023 of 0.7 percent.
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