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Norges Bank keeps the key interest rate unchanged at 0 percent, but the interest rate increases will come sooner than expected. Provides strengthening of the crown.
The case is continually updated.
That interest rates remain unchanged now is no surprise. The entire market has wondered what is the likely time when Norges Bank will first raise the interest rate by 0.25 percentage points: 2021 or 2022.
Norges Bank writes in a press release Thursday that they will keep interest rates unchanged for more than a year.
– The severe economic recession and great uncertainty about new developments indicate that interest rates will remain calm until we see clear signs that conditions in the economy are normalizing, says central bank governor Øystein Olsen.
Something faster
The forecast for the key policy rate implies an interest rate at the current level for more than one year.
Starting in the first half of 2022, interest rates will gradually increase as activity approaches a more normal level. The forecast implies an interest rate hike somewhat faster than projected in the previous monetary policy report.
Danske Bank’s chief economist Frank Jullum predicts an even faster interest rate rise. He still believes that Norges Bank will introduce the first interest rate increase in December 2021 and then increase interest rates twice in both 2022 and 2023. In that case, the key interest rate will be 1.25%. in three years.
Also read: Shock figures for Oslo: prices rose 10 percent
2.5 percent
The average mortgage rate is currently approx. 1.8 percent. With the latest Norges Bank forecasts, this interest rate will rise to around 2.5% in 2023. For a NOK 2 million mortgage, this basically means NOK 50,000 in annual pre-tax interest expense, a little more than NOK 4,000 per month.
The Norwegian krone has been very weak, but has strengthened this fall (see chart below). Norges Bank now expects a further strengthening of the crown, and that it will be stronger than projected in the previous September report.
The main reason is a higher interest rate differential with other countries, as foreign central banks are not expected to raise interest rates. In isolation, it will be more attractive to invest in Norwegian crowns. However, Norges Bank does not provide estimates against individual currencies.
Long-term Norwegian bond yields rose somewhat after the decision was made, while
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It’s not that bad
But the overall picture for the Norwegian economy towards the end of the corona year is not as bleak as it appeared this spring. Yes, there are big differences, but overall the economy has recovered surprisingly well and effective coronary vaccines are being applied. Then we can gradually ease the strict infection control measures.
DNB Markets wrote in Thursday’s morning report that they believe Norges Bank’s conclusion today is that the interest rate hike is approaching.
An important trade-off is how big the slowdown in the economy will be in the short term and how fast the vaccine-driven recovery will come. The second balance is between the need to support production and employment and the need for financial imbalances to continue to accumulate.
DNB Markets believed that Øystein Olsen & Co would place greater weight on financial imbalances. Examples of these imbalances are the undesirably strong growth of debt and the growth of house prices. The prediction for the morning was that the first interest rate hike would occur in the second quarter of 2022. It is almost inertia.
Accelerated
Handelsbanken Capital Markets predicted in the morning that Norges Bank would accelerate the first interest rate hike in one to two quarters.
Norges Bank writes in the press release that low interest rates help output and employment return to more normal levels more quickly. This reduces the risk of unemployment rising to a high level.
On the other hand, house prices have risen markedly since this spring. A prolonged period of low interest rates increases the risk of financial imbalances building up. Therefore, it is this compensation that DNB was talking about.
Carl O. Geving, executive director of the Norwegian Real Estate Association, says in a comment on the current interest rate decision that the housing market has been heavily affected by the effect of the interest rate in 2020.
– We believe it will be some time before the Norwegian economy allows for higher interest rates and in any case interest rates will remain low for the foreseeable future, says Geving.
Higher consumption
In the recent report, Norges Bank notes that increased demand from households in particular has contributed to increased activity in the continental economy since last spring.
The central bank expects wage growth this year to be 2.2 percent, which will fall to 2 percent next year. With an expected price increase in 2021 of 2.2 percent, there will be a slight decrease in purchasing power.
And the central bank expects fairly strong house price growth, which in isolation speaks in favor of faster interest rate hikes. The forecast is now 6.7 percent growth.
The mainland economy is expected to fall 3.5 percent this year, but to rise 3.7 percent next year. Here, there are minimal adjustments to the September forecast.
Also read: Horror figures about the real estate market: – This is worrying
First
In any case, Norges Bank could be the first central bank to raise interest rates, at least in the OECD area. The US Federal Reserve announced a key interest rate unchanged through 2023 on Wednesday evening Norwegian time.
The interest rate meeting (yesterday) is otherwise a regular meeting, in which the Norges Bank presents revised forecasts for the Norwegian economy and the so-called full monetary policy report. It happens four times a year, the previous report came in September.
Since then, there have been two tentative meetings in which there have been few new signs.
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