Norway’s central bank raised its policy rate once again on Thursday, in its latest attempt to control inflation. That’s sparked some criticism that rising interest rates may hurt the job market, but other new numbers indicate an ongoing labour shortage.
Norges Bank’s committee charged with maintaining financial stability in Norway announced it had unanimously voted to raise its policy rate by another half-point, to 2.25 percent. It was exactly what many economists and analysts had predicted and follows even bigger interest rates hikes in other countries including the US.
It means Norwegian commercial banks’ lending rates will rise accordingly, even though mortgage rates of around 4 percent will remain unusually low compared to those tolerated by earlier generations. Savers should also finally get higher interest paid on their deposits.
More ‘gradual’ increases loom
The central bank’s committee also stressed that its policy rate “will most likely be raised further in November.” Several economists and analysts expect the policy rate will end the year at 2.75 percent, with the bank itself suggesting the rate will settle at “around 3 percent” this winter.
Norway’s state statistics bureau SSB (Statistics Norway) has set the country’s current inflation rate, meanwhile, at 6.5 percent after big jumps in prices for food, housing, energy, transport and other consumer goods. That’s “markedly above our target of 2 percent,” said Norges Bank Governor Ida Wolden Bache, “and there are prospects that inflation will remain high for longer than projected earlier. We are raising the policy rate with the aim of bringing down inflation.”
She could point to how the central bank’s decision to raise it from zero to 2.25 percent over the past year “is starting to have a tightening effect on the Norwegian economy.” That in turn “may suggest a more gradual approach to policy rate settng ahead,” the bank’s committee stated in Thursday’s announcement, adding how “the projections in this report are based” on the 3 percent estimate “in the course of winter.”
Rising interest rates have worried economists at SSB. They claim that the central bank’s preferred price growth of just 2 percent threatens the goal of high employment levels. Newspaper Dagens Næringsliv (DN) also published a reminder this week from Roger Bjørnstad, chief economist at Norway’s largest trade union federation LO, that “jobs for everyone is still goal number one.” Steinar Holden, a professor of economics at the University of Oslo, has also called upon Norges Bank to cancel some of its planned interest rate hikes in order to keep the unemployment rate low.
It fell on Thursday, though, with SSB reporting it at 3.1 percent. According to state welfare agency NAV’s methods of compiling it, unemployment fell to just 1.7 percent in July, the lowest level since 2008. Demand for workers remains high in Norway, as customers have streamed back after the pandemic eased but employees have not.
News bureau NTB reported earlier this week that nearly 30 percent of Norwegian companies and public agencies struggle to find employees with the competence needed to perform jobs available. The lack of workers is especially serious within the construction industry, other skilled trades and health care, while restaurants and retailers also need more help. There was an acute labour shortage within the tourism business last summer, for example, with newspaper Aftenposten reporting on alleged “cannibalism” as employers tried to outbid one another to hire away workers. There also haven’t been enough Norwegians to replace all the foreign workers in service industries who left the country during the pandemic. Many haven’t returned.
Norges Bank reported that “the future path of the policy rate will depend on how the economy evolves,” while admitting that projections are “more uncertain” than normal. Russia’s war on Ukraine has disrupted supply lines and resulted in shockingly high energy prices, for example, and things can get worse before they get better.
“If there are prospects that inflation will remain higher for longer than we now project, there may be a need for a higher policy rate,” the bank stated on Thursday. “A more pronounced decline in inflation and activity than currently projected may reduce the need for rate increases.”
Governor Bache and the central bank’s committee appear to be listening to the critics, and also acknowledged how many Norwegians “will be facing a squeeze on finances given the rapid rise in prices at the same time as the policy rate is being raised.”
They claimed, however, that “a faster rate rise now reduces the risk of inflation becoming entrenched at a high level,” which in turn could demand even “sharper tightening of monetary policy (and higher interest rates) further out.”