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Monday, July 15, 2024

Interest rates rise on a strong economy

Norges Bank raised its key policy rate on Thursday in a move that was widely expected but also debated. Norway’s central bank board ultimately decided that economic growth is stronger than expected, and the country’s currency immediately strengthened on the news.

Norway’s economy is sailing ahead, prompting the country’s central bank board to decide that it was time to cool things down a bit with a quarter-point rise in interest rates that also strengthened the krone. PHOTO: Norges Bank

The quarter-point rate rise to 1 percent was modest and at least may cheer those with savings accounts that have been earning pathetic amounts of interest. Borrowers are likely to see Norway’s banks respond quickly to the rate rise, with mortgage rates set to move up and possibly cool the real estate market at the beginning of the busy spring season.

The value of the Norwegian krone, which has been unusually weak lately, jumped when the interest rate rise was announced. It recently cost as much as NOK 8.80 to buy one US dollar. It cost NOK 8.42 within a half-hour of the rate hike announcement on Thursday.

Difficult decision
Economists have acknowledged in Norwegian media this week that the central bank’s decision couldn’t come easily. Steinar Holden, a professor at the University of Oslo, told newspaper Dagens Næringsliv (DN) on Wednesday that he thought interest rates should remain steady because employment levels are “relatively low.” Employers don’t have trouble finding people to hire and that, according to Holden, suggests “available capacity in the economy” at a time of uncertainty around international growth prospects. He said the central bank board faced “a difficult evaluation.”

That was confirmed by DN‘s panel of economists, who were split on whether interest rates should rise. Two out of five thought they should remain unchanged, while the other three supported a hike. “The Norwegian economy has been in an upturn with good growth for a couple of years now,” argued Hilde C Bjørnland, a professor at the Norwegian Business School BI in Oslo who favoured a rate rise. “Unemployment has fallen and inflation is moving up. The rise in oil prices has contributed to an upswing in the oil business.” That has ripple effects throughout the entire Norwegian economy

Inflation concerns
Inflation has indeed been rising, however, and there’s a desire both at the central bank and within the Norwegian government that it not exceed 2.5 percent. The strong economic growth is also expected to lead to renewed wage growth after several years of moderation. “The Norwegian economy is expanding at a solid pace,” the board stated in its press release Thursday morning. It noted how “uncertainty surrounding global developments … suggests a cautious approach to interest-rate setting.”

The key phrase in the board’s defense of its quarter-point rise was its evaluation that “the upturn in the Norwegian economy appears to be stronger than anticipated earlier.” The bank clearly wants to control that while also seeing the economic strength better reflected in Norway’s currency.

More interest rate hikes loom: “Overall, the outlook and balance of risks imply a gradual interest rate increase ahead,” the bank board stated, further suggesting more interest rate hikes in the months ahead. That was confirmed by Norges Bank Governor Øystein Olsen, who stated that the central bank’s key policy rates “will most likely be increased further in the course of the next half-year.” Berglund



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