June 10, 2023


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The professor thinks that the interest rate should go up: – The exchange rate of the krona worries me more and more

While the turbulent banking sector threatens financial stability in the United States and Europe, Central Bank Governor Ida Walden Bach will deliver his second interest rate decision of the year on Thursday. At the same time, it will present a new Monetary Policy Report, which contains the updated interest rate path.

Hilde Bjornland, professor of economics at BI Business School, believes Norges Bank should raise interest rates by 0.25 percentage point, to 3.0 percent. She points out that the unrest in the banking sector is primarily an American problem, which she believes should be resolved through stricter regulation from the US authorities.

– I do not think that this will spread and become a serious global financial crisis, as we saw in 2008-2009. But there is no doubt that the US has a financial stability problem, and that the authorities should increase the number of banks they monitor through annual stress tests.

– However, the main problem for the Bank of Norway is still that inflation is not under control. I think Norges should raise interest rates and point to a slightly higher interest rate path, thus showing that it takes inflation seriously, says Bjornland.

– It worries me

On Wednesday evening Norwegian time, the US central bank (Fed) will present its interest rate decision. The market is pricing in the prevailing possibility of a 0.25 percentage point hike in the interest rate, while there is a small chance that the interest rate will remain fixed. The market will also follow the specific signals the Federal Reserve is giving about future rate setting.

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Just like what the US central bank is doing, the right thing to do is for Norges Bank to raise interest rates, Bjørnland believes. She points out that the krone is at its weakest level in over a hundred years so far in 2023, making imported goods and services more expensive.

The European Central Bank (ECB) has already put pressure on Norges Bank after last week’s surprise interest rate hike of 0.5 percentage point. The interest rate differential between Europe and the United States is currently larger than normal, which separately affects the krone.

– The exchange rate of the krona worries me more and more. The increasing imported inflation will gradually spread through the currency channel in many regions. If the krone continues to weaken, it will lead to more inflationary pressure, which is unfortunate for both households and businesses, says Bjornland.

– If the Norwegian Bank waits to raise interest rates now, there is a risk that inflation expectations will increase, which will be reflected in the next wage negotiations. That will make the fight against inflation more urgent, says Bjornland.

– I do not think so

Economics professor Kjetil Storesletten (UiO) advocated in December that central banks should act more aggressively. Sturzliten believes that the banking crisis should not stop the US central bank this week.

Is it bad that very bad banks that didn’t hedge interest rate risk go out of business? It is very unfortunate that some of the smaller banks take limits on what central banks can do. We can discuss the pace of interest rate changes well, but it is important that central banks have the freedom to set interest rates to control inflation and not keep weak banks alive.

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Storyten thinks the Bank of Norway should follow suit with an increase of 0.25 percentage point. Storylines believes there is a real risk that people and businesses will lose faith in the 2 percent inflation target, if inflation remains high for too long.

Kjetil Storesletten is a former member of the Executive Board of Norges Bank.

Kjetil Storesletten is a former member of the Executive Board of Norges Bank. (Photo: Gunnar Lehr)

In one of the publications, Sturzliten writes that wages increased more than productivity last year, which he believes gives reason to fear the spiral of wages and their prices. Sturilten believes that the front-line model, in which a competitive sector negotiates higher wages first, will only exacerbate the problem, as the sector is doing so well.

Wage growth is already higher than the Bank of Norway should be comfortable with. The Fronftfags model won’t save us, says Sturzliten.

– Totally wrong

LO chief economist Roger Bjornstad thinks Sturzelten misses the mark entirely for his position.

Storesletten is completely wrong, both in her understanding of the numbers and in her conclusion. Wage growth was lower than growth in value creation last year. While mainland and Norway’s gross domestic product increased by 8.5 percent, total labor costs increased by only 8.0 percent, Bjornstad says.

– Also, if it were not for the front-line model, we would have had higher inflation, higher unemployment, less value creation, less competition and less trust in the population. The front-line model has served us well, and it is also the solution to the current situation.

LO Chief Economist, Roger Bjornstad.

LO Chief Economist, Roger Bjornstad. (Photo: Adrian Nielsen)

What should the Bank of Norway do this week?

At least the interest rate should remain calm. Now there is also growing financial turmoil internationally, which only strengthens the argument. I’m afraid interest rates will need to be cut as well, but I’m not a fan of yo-yo rates, so I prefer flat rates.

Bjornstad has long been critical of the Bank of Norway’s monetary policy. His main thesis is that increased interest rates are the wrong medicine for inflation which is “all imported from abroad”.

High interest rates create more problems than solutions. After all, there is no domestic inflation, so higher interest rates are likely justified by the defense of the krone exchange rate, but weak for reasons entirely different from the interest rate, Bjornstad says. (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.