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Wednesday, April 17, 2024

Rates to rise as economy rebounds

Norwegian economists are predicting brighter days ahead and Norway’s central bank is following through with predictions of its own: Interest rates will probably rise in September and a few more times during the next year, but will continue to remain historically low.

Outdoor restaurants and bars have been opening up again like here in Oslo, where the economic outlook is much brighter than it’s been since the Corona crisis began. PHOTO: staff

Norges Bank quickly brought rates down to zero when the Corona crisis first paralyzed the country in the spring of last year. They’ve remained at zero since May 7, 2020 and will stay there through this summer, along with an overnight lending rate of 1 percent and a reserve rate of -1 percent.

Norges Bank Governor Øystein Olsen said on Thursday, however, that given the current economic outlook “and balance of risks,” the bank’s Monetary Policy and Financial Stability Committee “will most likely” raise its key policy rate in September. The size of the increases are most likely to come in the form of quarter-point increments.

The goal, according to the central bank’s own prognoses, is for the key policy rate to return to the level where it was before rates were slashed last year (1.5 percent) by 2025, maybe sooner if inflation picks up. That’s still extremely low for all those who remember double-digit interest rates in the 1980s and 1990s, but it will mean higher mortgage payments for most everyone who’s bought a home at high prices during the past few years. Many first-time home buyers in Norway have never experienced an increase in their monthly payments. Higher interest rates can also put a damper on housing price growth, which has been so strong in recent years that only a tiny percentage of first-time buyers can afford a home in Oslo, for example.

‘Seriously brigthening up’
Higher rates will also strengthen the krone, which has been historically weak, and generally represent a return to some sense of normalcy after an extremely abnormal year. As Corona virus containment measures ease or are removed, the economy is expected to rebound.

Uncertainty remains, especially if new virus strains lead to new outbreaks, but most agree that pent-up demand and fatter savings accounts will lead to a burst of consumer spending later this year. The central bank noted that “economic activity now seems to be rebounding sharply and somewhat faster than projected earlier,” also because the pace of vaccinations has accelerated.

“Now things are seriously brighting up,” said Øystein Dørum, chief economist for Norway’s national employers organization NHO, when releasing a new quarterly economic outlook earlier this week. He cited “liberating vaccinations” and predictions that most of Norway’s adult population will be fully vaccinated by September.

NHO predicts that after a decline in Norway’s mainland GNP last year, the organization predicts an increase of 3.3 percent this year and another 3.5 percent next year. Unemployment is also falling rapidly and likely to stabilize at around 4.6 percent this year, falling to 4 percent next year and 3.6 percent in 2023. State welfare agency NAV, which administers unemployment benefits, is more optimistic, predicting a jobless rate of 3.3 percent by the end of this year and just 2.6 percent next year.

Bigger savings accounts
Economists also estimate that Norwegian households saved an extra NOK 130 billion during the Corona year 2020, when it was actually difficult to spend money with stores closed and most forms of travel and entertainment halted. A lot of that may now be plowed back into the economy. Some oil traders also think oil prices, which already have risen to around USD 74 a barrel, may rise back up to USD 100 a barrel. That’s always good for the economy of an oil producing nation like Norway.

Challenges remain, many of them tied to Norway’s still strictly controlled borders that have disrupted the entry of tourists and especially foreign workers. That’s hurting the tourism, construction, agriculture, industrial, hotel and restaurant sectors that rely on lower-paid foreign workers from within the EU or beyond.  There’s also the risk that inflation will rise, with prices already rising for food and other raw materials worldwide, not just in Norway.

State statistics bureau SSB (Statistics Norway) now estimates that the Corona crisis has resulted in an economic loss of around NOK 330 billion (USD 40 billion) for Norway. Government officials could offset that with emergency withdrawals from Norway’s sovereign wealth fund (the Oil Fund) amounting to around NOK 370 billion more than normally allowed. On the other hand, Norway can emerge from the Corona crisis with no national debt, just as the country is getting back to work. Berglund



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