The executive board of Norway’s central bank defied many local economists and other central bankers around the world on Thursday by going ahead with its plan to boost interest rates. The board wants to maintain economic and financial stability amidst “solid” economic growth, while also trying to rein in debt and housing prices.
The modest quarter-point rise in Norges Bank‘s key policy rate, to 1.5 percent, comes at a time when other countries have been lowering interest rates. Norway proved itself as annerledes- land (being different) once again, but on the back of a strong economy that also goes against the stream internationally.
It will likely be the last in a series of similar interest rake hikes over the past year, however. Central bank boss Øystein Olsen stated that the board’s “current assessment of the outlook and balance of risks suggests that the policy rate will most likely remain at this level in the coming period.”
Rate hike disputed
Speculation and debate over an interest rate hike had flown prior to the bank’s announcement. On Wednesday, Norway’s leading business newspaper Dagens Næringsliv (DN) had reported that its expert panel of top Norwegian economists including three professors were unusually united in their belief that the key policy rate should not be raised. Most think the key policy rate should have topped out at 1.25 percent, with the chief economist at Handelsbanken Capital Markets, Kari Due-Andresen, even suggesting that rates should gradually be reduced again.
They argued that international economic growth was slowing, that uncertainty tied to US President Donald Trump’s trade war with China and Brexit keeps growing and that interest rates were falling abroad. Hilde C Bjørnland, a professor of economics at Norwegian Business School BI also noted that Norway’s own economic growth was likely to top out as well because of all the international unease.
“Interest rates should stay where they are,” Steinar Holden, an economics professor at the University of Oslo, told DN. NTNU Professor Ragnar Torvik and Knut Røed, a researcher at the Frisch Center, agreed.
The central bank board clearly disagreed, not least because Norway’s economy continues to do so well. It noted that underlying inflation is close to the board’s target, that “growth in the Norwegian economy remains solid” and that capacity utilization is “somewhat above a normal level.” With unemployment likely to remain low and wages rising, “a higher policy rate may also mitigate the risk of a renewed acceleration in debt growth and house price inflation,” the bank stated.
There’s no question Norway’s economy continues to thrive in contrast to many other countries. DN reported last week how Norway’s Purchasing Managers Index (PMI) rose strongly in August, indicating good times within Norwegian industry. Its 5.1 point rise to 53.8 indicates ongoing growth that’s expected to continue not least as oil prices rise. While economists warn that export firms may see lower demand, the PMI showed that export orders keep increasing.
On Wednesday, newspaper Aftenposten could also report that Norwegian companies are generally optimistic and expect to boost employment levels. The Norwegian branch of employment agency Manpower questioned 753 Norwegian employers for its latest barometer over the job market, and found that far more plan to hire than fire. Only 4 percent planned to reduce staffing in the fourth quarter of this year.
“These are surprisingly good numbers,” Maalfrid Brath, chief executive of Manpower Group, told Aftenposten. “Norwegian employers are marching optimistically into the fourth quarter.”
Weak krone gained some strength
Few economists fear any major crack in the strong real estate market either, although concerns remain over high housing prices and how difficult it is for first-time buyers to enter the market. They fear higher interest rates will make it even more difficult.
Lending rates remain historically low, however, and at least one leading Norwegian economist, Øystein Dørum of the national employers’ organization NHO, favoured a rise in the policy rate. He fully supports the central bank’s decision to stick to its plan of gradually raising interest rates.
“Here at home the mood is still good, both in companies and households,” Dørum told DN just before the central bank’s announcement came. “Resource utilization is normal, salary growth has risen and the oil price is now at a level that suggests continued high activity on the Norwegian Continental Shelf.”
He also noted that Norway has the world’s next-highest household debt levels, behind only Denmark. “Even though Norway isn’t in a housing bubble (that could burst), you still have to question whether even more debt is the way to go to get even higher economic activity,” said Dørum, who earlier was chief economist at Norway’s biggest bank, DNB, which had predicted rates would not rise. “Lower rates mean that folks have more money to spend and that can increase the desire to borrow.”
Thursday’s interest rate hike is likely the last for the forseeable future, however, given Norges Bank Governor Olsen’s assessment. The rate rise slightly strengthened the value of the krone, meanwhile, after the past few weeks of historic weakness when it cost over NOK 9 to buy one US dollar. By late morning on Thursday, and an hour after the central bank’s report, it cost NOK 8.91.
Read the central bank’s announcement in English here.