Why on earth should you cut it now? – letter

Why on earth should you cut it now?  – letter

Imagine that you have just returned home from a five-year space journey, without any contact with people on Earth. You didn't read the news.

Tomorrow morning she will start a new job as Central Bank Governor at Norges Bank.

At the end of the evening, you will be handed a sheet of basic information about how the Norwegian economy is performing at the moment. On the paper it says:

  • Wage growth: 5.2 percent.
  • Unemployment: 1.9 percent.
  • Price increase: 3.0 percent.
  • Growth in the mainland economy: 0.2 percent.

No one will choose to lower interest rates

In summary, these figures show a good level of activity in the Norwegian economy, perhaps excluding growth in the mainland economy (expectations also indicate that it will rise sharply next year).

And then I didn't even mention that pRice worth 1 euro now costs 11.5 Norwegian kroner, whileRice for one dollar is 10.5 kroner. These are historically low levels for the krone.

On Wednesday, you will lead your first interest rate meeting at Norges Bank. Based solely on the key numbers in the paper, what is the right decision? Raise the interest rate, do nothing or lower the interest rate?

The vast majority of economists will probably choose one of the first two options. No one will choose to lower interest rates.

A strong opinion that the interest rate should fall

Getting off a space rocket before you start your job as a central bank governor would certainly never happen in real life, but it's an interesting thought experiment nonetheless.

Because even though the numbers are clear, there is still a fairly strong opinion “out there” among people that interest rates will fall soon. And when it is first put in place, there will be parts on the assembly line. Many people who have lived with relatively high interest rates for a year and a half to two years seem to be holding out hope that things will improve soon.

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It depends.

Because although interest costs for everyone with a mortgage have risen dramatically in the past couple of years, there is little in the big picture that can ever… Whispers regarding the imminent reduction in interest rates. On the contrary, there are a few economists who are now opening the door slightly to a final interest rateto rise this week.

Kind of “The grand finale” After two years of what many saw as the purest interest rate terrorism.

Consumer Protection Authority invoice fees-10

Lowering interest rates is not at the top of the Norwegian Central Bank's agenda.

Photo: Snorri Tunisit/NRK

The list of counterarguments is long

Because the list of counterarguments against imminent interest rate cuts goes on.

First, the krone exchange rate remains weak. It is still hovering around historically low levels. It affects us in many ways. One way is that our export companies are paid very well for everything they sell abroad, which gives these companies good profitability. This is also part of the reason why salary settlements are up this spring.

At the same time, everything we import from abroad costs more. This has helped drive price growth here at home. This effect has certainly subsided, but Handelsbanken points out in a recent report that price growth for goods and services produced in Norway has now remained stuck at high levels – which is also linked to very strong wage adjustment.

“No” foreigners will work here

In addition, the weak krone makes it difficult to employ foreign workers, because they receive lower wages here than they did a long time ago. The unemployment rate remains at around 2%, a historically low level. The labor market is under pressure, with many vacancies – especially in health and care.

In order to put the krone on a better path, we have to wait for other countries to lower interest rates, before we can lower the interest rate here at home. As is known, money flows to countries where the interest rate is the highest, and if we lower the interest rate now, the krone will likely become less valuable.

On the way to a war economy

The new factor that is emerging is that the world is moving towards a kind of war economy.

Elizabeth Holvik, chief economist at Sberbank 1, has pointed out this on several occasions and points out that the main trends of de-globalisation, rearmament and declining production will affect the global economy for many years to come.

This leads to increased investment in many countries and increased public spending. Also here at home.

US Federal Reserve

The US central bank believes that we will have a higher interest rate level than we are used to in the future.

Photograph: Nicholas Kamm/AFP

The US central bank has increased its estimate of what it believes interest rates will be in the long term. She believes the new normal will be a higher level of interest rates than we were accustomed to in the decades when we were able to reap the gains from increased globalization and disarmament.

Norway may not be an exception in this context.

Resists rising interest rates

We see time and again that the Norwegian economy has withstood the long series of interest rate increases well. Surprisingly, we believe Central Bank Governor Ida Walden-Basch herself. The housing market, a good barometer of the private finances of thousands of households, is strong. Banks indicate a high demand for financing certificates and home purchases before they are offered.

Good wage growth and a strong labor market where the vast majority of people work means that many Norwegians still have a good personal economy – although there are also thousands of families now struggling.

On Thursday, many believe that the Norwegian central bank will push through its first interest rate cut in time, perhaps until next year. Some also believe there is a certain risk of a sudden final hike in interest rates.

Maybe it's time to change the question from “When will the first rate cut be made” to “Why should we cut rates now?”



06/18/2024 at 17.19

Dalila Awolowo

Dalila Awolowo

"Explorer. Unapologetic entrepreneur. Alcohol fanatic. Certified writer. Wannabe tv evangelist. Twitter fanatic. Student. Web scholar. Travel buff."

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