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WORKING IN NORWAY

Will wage increases from strike deal lead to higher prices in Norway?

This week the parties in the wage settlement negotiations agreed on a framework to increase wages by 5.2 percent. But it might not all be good news as a prominent Norwegian economist has warned.

Wallet
On Thursday, the unions rejoiced over what they deemed a significant victory, but economists swiftly cautioned about the possible negative impact of the deal that ended Norway's general strike. Photo by Nicolas J Leclercq on Unsplash

A four-day general strike in Norway’s private sector ended on Thursday afternoon after the parties in the labour conflict reached an agreement.

The Norwegian Confederation of Trade Unions (LO) and the Confederation of Vocational Unions (YS) represented the employees, while the Confederation of Norwegian Enterprise (NHO) represented the employers.

The two sides agreed on a framework of 5.2 percent wage growth, with a large proportion of this given in general supplements.

While the unions were celebrating what they called a “historic win,” economists were quick to warn about the potential adverse effect of the deal on inflation.

A wage-price spiral in the making?

The agreement between the unions and businesses in this year’s wage settlement could lead to price pressure, chief economist Harald Magnus Andreassen at Sparebank 1 Markets told the news bureau NTB on Friday.

“If we set aside the industry and the power producers, then the rest of the business world is not doing so well. The increased prices were less than the rise in costs last year,” Andreassen said.

With wage growth of 5.2 per cent, these companies will be clearly pressured to increase prices, according to the economist, who believes the business world outside of industry and energy sectors will struggle with this year’s wage settlement.

Furthermore, the chief economist warned that the combination of the wage settlement and increased productivity could lead to inflation over time being well above 2 percent, which is the inflation target of Norway’s central bank (Norges Bank).

Other economists have also warned of the danger of a wage-price spiral forming, as rising wages put upward pressure on prices and inflation.

What will happen with interest rates?

In the run-up to the 2023 wage settlements talks, there has also been some discussion in Norwegian media on whether the outcome of the negotiations could – indirectly – lead to higher interest rates down the road.

Andreassen thinks the settlement will not lead to higher interest rates than what is already planned by Norges Bank.

“Norges Bank assumed wage growth of 5.1 percent. So this does not change much for them; Norges Bank will not reassess the outlook for wage and price growth (based on this outcome),” Andreassen said.

He pointed out that it is difficult to say anything for sure about inflation and interest rate trends, but he encouraged people to be aware that interest rates will rise.

“We could very well get a mortgage interest rate of around 5 percent. Adjust your personal finances today, and expect interest rates to rise. Use less money and pay down more debt. For many who have a lot of debt today, that is obviously the most sensible thing to do,” he said.

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ECONOMY

Why Norway is now unlikely to cut interest rates before 2025

In a change from earlier plans, Norway's central bank announced Thursday that it was unlikely to cut interest rates before 2025.

Why Norway is now unlikely to cut interest rates before 2025

The current key policy rate of 4.5 percent will likely remain unchanged for the rest of the year, Norges Bank announced on Thursday.

“If things go as we now believe, the key interest rate will remain at 4.5 percent for the rest of the year, before it is gradually reduced,” Ida Wolden Bache, governor of the central bank, said.

The key policy rate was last raised at the end of last year and was the 14th interest rate increase since the autumn of 2021.

When the central bank last presented its forecast and expectations for the key policy rates in March, it said it would lower rates during the second half of the year – most likely in September.

Therefore, consumers in Norway can no longer expect their loan or mortgage repayments to become cheaper in 2024. In recent months, many economists had predicted the central bank would delay implementing cuts until the end of 2024.

One of Norway’s largest banks, DNB, and the country’s national data agency, Statistics Norway, forecast interest rate cuts to arrive in December.

The bank had been using cuts to prevent the economy from overheating and curb inflation. While inflation has fallen slightly below expectations, factors like high wage growth and a stronger-than-expected economy have influenced the bank’s decision.

“The committee’s assessment is that the interest rate is high enough to bring price growth down to the target within a reasonable time, but that there will be a need to keep the interest rate up somewhat longer than previously estimated,” the bank said in its explanation.

Chief economist at Sparebank 1 Gruppen, Elisabeth Holvik, told the Norwegian newswire NTB that the bank had also held off cutting interest rates to prevent the Norwegian krone from weakening any further.

Wolden Bache said that the weak krone had contributed to inflation.

“The devaluation of the krone that we have behind us still contributes to keeping price growth up,” she said.

The central bank’s governor also kept the door open to an interest rate increase if required.

Kyrre Knudsen, chief economist at Sparebank 1 SR-Bank, told NRK that the positive is that once the bank implements cuts, interest cuts will be made up to 2027.

“There were probably some who had feared that there could be talk of a somewhat higher interest rate. It is positive news that they are signalling a good number of interest rate cuts, both next year and up to 2027,” he said.

He also said that a stronger krone exchange rate could bring cuts forward.

“If the krone exchange rate strengthens a lot in the future, Norges Bank will also be able to come up with earlier interest rate cuts than what they are currently envisioning,” he said.

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