A decision by Norway’s central bank to opt for a second “double dose” interest rate hike on Thursday is aimed at cooling the country’s strong but overactive economy. Norges Bank also made it clear that its policy rate that guides all other interest rates will “most likely” rise further next month.
“A markedly higher policy rate is needed to ease the pressures (on) the Norwegian economy and to bring inflation down towards the target,” stated Ida Wolden Bache, Norway’s central bank chief. The bank’s Monetary Policy and Financial Stability Committee therefore decided to raise the policy rate by a half-point, twice the usual quarter-point increases, to 1.75 percent.
That means commercial banks and other lenders are likely to raise their interest rates by the same amount. Home mortgage payments along with those on all other loans will rise as well, further increasing the cost of living when inflation is already higher than it’s been since the late 1980s.
The central bank noted in its announcement Thursday morning that inflation “has been considerably higher than projected and markedly above the 2 percent target.” More than double, in fact: Norway’s overall inflation rate based on its consumer price index (CPI) jumped to 6.8 percent in July, while the core inflation rate (the CPI minus increases in energy, taxes and fees) landed at 4.5 percent, according to state statistics bureau SSB (Statistics Norway).
That was much higher than most economists had expected, so the interest rate hike announced Thursday came as no surprise. Most analysts and economists now expect more half-point increases as part of efforts to bring inflation down. “We’re near an overheating of the economy,” Olav Chen, now in charge of asset management at Norwegian insurance and finance firm Storebrand, told news service E24 last week.
So many things that usually mark the sign of a strong economy now seem to be working against it in Norway: Large companies have been reporting huge quarterly earnings, consumer activity is high, housing demand also remains high and unemployment is at its lowest level since the mid-2000s. All that is constantly leading to higher costs and prices.
“In order to reach the goal of 2 percent inflation, wage growth must be held down,” Chen noted, “but that’s not possible with such record strong labour markets as we’re seeing in Norway, Europe and the US.” It’s not uncommon for workers to demand pay hikes that will give them some real income growth and help them keep up with the cost of living. Recent settlements of less than 4 percent are no longer satisfactory when prices for food, fuel and not least electricity have risen much higher.
The central bank’s committee also noted that activity within the Norwegian economy “is high with little spare capacity” and that unemployment has fallen further and is at “a very low level.” Higher prices on just about everything (often blamed on a post-Corona boom in consumer demand and higher costs and market disruption caused by Russia’s war on Ukraine) “may entail that inflation will remain high for longer than expected earlier,” according to Norges Bank, which warned that interest rates “may rise faster” than forecast in June.
That’s because a faster rate rise now, Bache and her colleagues believe, “will reduce the risk of inflation becoming entrenched at a high level,” along with the risk of tighter monetary policy. The committee was thus concerned “with the large degree of uncertainty” surrounding the economic outlook. Higher mortgage rates “may cool down the housing market and curb household consumption,” while also leading to a sharper slowdown in global growth. The value of Norway’s currency, the krone, remained relatively steady on news of Thursday’s interest rate hike but remains generally weak against the US dollar.
While most economists expected the latest rate hike, some were critical including the head of Norway’s national real estate brokers’ federation (Norges Eiendomsmeglerforbund). “For households with large mortgages, higher interest costs will bite much more than higher prices for energy, food and fuel,” federation director Carl O Geving told state broadcaster NRK.
Others note, however, that interest rates have been extremely and unusually low for many years and that borrowers have been warned to expect and be able to handle increases in monthly payments. A consumer economist at Norway’s largest bank, the highly profitable DNB, likened the interest rate hike to medicine against higher prices. DNB forecast mortgage rates of around 4.5 percent during the course of next year, still way below the double-digit rates that were common throughout the 1990s. Few Norwegians are expected to face losing their homes: “Instead it will rather be smaller boats and less luxury,” one borrower in Tønsberg told NRK.