On Thursday, the stage was set for the interest rate decision and monetary policy report from the Bank of Norway. The chief economist says it will undoubtedly be the biggest thing to happen this week.
After the latest report from the regional network, many brokerage firms expect the central bank to raise interest rates by 0.5 percentage points.
The previous increase came in May, when the key interest rate was raised by 0.25 percentage point, to 3.25 percent. Sarah Middegaard, chief economist at Handelsbanken, believes Norges Bank is in for a tough interest rate meeting.
The Bank of Norway has a knife to its throat this time. They must show that they take the 2% inflation target seriously. We think they’re heading for a 0.50 percent increase, given all the details we’ve received since the last rate meeting. Price pressure in the Norwegian economy remains significant and core inflation is very high, Midtgaard tells E24.
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Price inflation has become more elastic
The central bank has repeatedly raised interest rates in an effort to curb the sharp rise in prices. In May, inflation was higher than expected at 6.7 percent, compared to the same month last year.
The chief economist believes that only now, after the fall, will we see the effect of rising interest rates on people’s finances.
– It is not yet known the impact of these increases on the real economy. Now the economy is in a very different place than it was when the first increases came. Thus, what comes now is largely felt in people’s wallets. This is the area where you approach your pain threshold. But she thinks this is necessary.
Tracks interest rate hikes
Midtgaard believes Norges Bank will raise its interest rate range slightly from 3.5 to just over 4 per cent, with another rate hike likely. On Wednesday, the US central bank, the Federal Reserve, kept interest rates unchanged in the range of 5-5.25 percent. This is the first rate hack in over a year, but here, too, two more hikes announced in 2023.
– There are possibilities for the interest rate path to rise. If the Norges do not keep up with the Fed, they could risk weakening the krone further. Despite the slight rise in recent days, the significant depreciation of the krone this year means continued activity and pressure in the economy, something they might not have expected a few months ago. The Bank of Norway now has no choice but to raise interest rates.
On Thursday last week, the European Central Bank also raised interest rates in the eurozone by 0.25 percentage point, to 3.5 percent.
– something inexplicable
The Monetary Policy Report will also be presented on Thursday. There, Midtgaard expects Norges Bank to go into more detail on the NOK.
– This has been hot in recent months. Now they must come up with analyzes and explanations as to why the Norwegian krone is as weak as it is. They must also explain their trade-offs against inflation and growth prospects. Whether economic growth will slow or not. If we look at the report from the regional network, it points in the opposite direction. All will be interesting, the chief economist assures.
Midtgaard believes Norges Bank is letting itself worry about a weak krone. She believes there are several explanations for the depreciation of the krone. There are aspects such as interest rate differentials abroad, market turmoil and low gas prices. Other things that usually affect the krone, such as oil prices and Fix pointerFix pointerThe Vix is often referred to as the “fear index” because it measures the volatility of stock markets. Usually, the index goes up when you see a sharp decline in the stock markets, while it goes down if the markets go up.They usually have to be linked to models that explain how the krone evolves, says Midtgaard.
– but now they don’t fit together. There is something else that is causing the krone to weaken which cannot be explained. It’s worrying. It would be appropriate to research further into why this weakness occurs. This is a very important factor that also affects core inflation.
NHO expects strong krone strengthening – blames the model
A level we have to get used to
And it sees no signs that Norges Bank’s inflation target of 2 per cent will be reached any time soon. Handelsbanken operates with forecasts of core inflation of 2.2 percent and a headline interest rate of 3.25 percent at the end of 2025.
– This is a level to which we will have to get used to in the next few years. The interest rate path to be introduced on Thursday likely indicates no cutbacks on the stairs. Wages pressure in the Norwegian economy is very high and the labor market is tight. This means that the primary stress lasts for a long time. This takes a long time to come down compared to our trading partners.
Additionally at home, the central banks of both Great Britain and Turkey will make interest rate decisions during the week.
Currency Strategist: A double jump in interest rates is needed for the krone to become stronger
Vacation home statistics and many interest rate notices
Next week also presents holiday home statistics from Eiendom Norge. Many experts see signs that the cottage boom in Norway that occurred during the pandemic may now be making a comeback.
– Maybe that time is up, yeah. The evolution and turnover of residential home prices has a close relationship with the housing market. It actually held up quite well, but now that it’s starting to gnaw at the wallet, there are probably more people who might have planned to buy or build a vacation home who have put this on hold, says Midtgaard.
She points out that much of the cash that Norwegians saved during the pandemic has been lost.
– Our additional savings during the pandemic amounted to 12 percent. After reopening, the savings rate may be negative for a long time, but many savings seem to be exhausted. We also see this in the decline in retail trade and consumption numbers.
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Statistics Norway expects two more price increases
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