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Historically weak krone to lead to higher interest rates

The weak krone against most major currencies means that Norway’s central bank will likely raise interest rates to 3.75 percent and beyond this year,

Pictured is central Oslo from above.
Interest rates will likely be raised in part thanks to a record weak krone. Pictured is Oslo City Centre from above. Pictured is central Oslo from above. Photo by Gunnar Ridderström on Unsplash

A struggling krone means it will take longer for inflation to fall in line with the two percent target set by Norges Bank, Statistics Norway (SSB) has forecast.

“The record weak krone exchange rate is putting parts of the economic policy in Norway to the test,” SSB researcher Thomas Von Brasch said of the krone.

“We estimate that the central bank will raise the interest rate by 0.25 percentage points in both June and September so that the peak interest rate will be 3.75 per cent in the autumn,” Brasch said.

Norges Bank has been using interest rates to try and control inflation in Norway. In May, prices were 6.7 percent higher than the same month a year before.

The cost of flights, food and rent were the main drivers of the inflation figures. Price growth on imported goods, caused by the weak, has also contributed to the increased prices in Norway.

Lower interest rates in Norway than elsewhere also drive a weak krone. 

Norway’s largest bank, DNB, expects interest rates to be even steeper. It expects Norges Bank to raise the key policy interest rate by 0.5 percent in June. This would bring the key policy rate to 3.75 percent.

A number of economists have said that the inflation figures released Friday were bad news for the central bank.

“Norges Bank has a bigger job to do than what they have assumed so far,” chief economist for Nordea Markets, Kjetil Olsen, told Norwegian business newspaper Dagens Næringsliv.

He also predicted an interest rate peak of more than four percent.

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MONEY

Prolonged peak: What Norway’s latest interest rate announcement means for you

Norway's central bank raised the key interest rate to 4.25 percent on Thursday and said another increase was likely in December. The higher-than-expected and prolonged peak will have knock-ons for your finances.

Prolonged peak: What Norway's latest interest rate announcement means for you

Norway’s central bank (Norges Bank) announced a 0.25 percentage point increase to the key interest rate on Thursday, bringing it to 4.25 percent.

This marks the thirteenth interest rate increase since the monetary policy tightening began in late 2021. Norway’s key interest rate now stands at its highest level since 2008, when it reached 5.75 percent.

However, unexpectedly, Central Bank Governor Ida Wolden Bache said a potential interest rate peak of 4.5 percent was to be expected.

Bache said that future interest rate adjustments will depend on economic developments and suggested another increase, likely in December.

In addition to the rate hike, Norges Bank unveiled an updated monetary policy report with an adjusted interest rate path. The new forecast indicates that the key interest rate will hover around 4.5 percent throughout 2024.

But what does this prolonged interest rate high – which surprised most financial analysts, who were expecting 4.25 percent to be the ceiling – mean for the day-to-day finances of people in Norway?

The effect on household finances

With rising interest rates and a generally high debt burden across the country, households have seen a sharp surge in interest expenses in recent years. The peak being higher and more prolonged than analysts expected, means that finances will be stretched for longer and further . 

While the central bank stated that most Norwegian households could weather the increased interest expenses, it acknowledged that many will need to adjust their consumption habits as interest costs eat into their disposable income.

The bank further believes that interest rates on people’s mortgages will rise to 5.7 percent in 2024 and will not fall until 2025.

Using the E24 online mortgage calculator, you can see that – with a mortgage rate of 5.7 percent – a mortgage of 2.3 million kroner over 25 years would mean a monthly payment of 14,201 kroner.

A decline in housing prices – and fewer new construction projects

The central bank now anticipates a modest decline in house prices of 0.3 percent in 2023, citing weaker growth and an increase in unsold homes as the background for its forecast.

However, the outlook for 2024 and 2025 is cautiously optimistic, with expectations of a 0.8 percent and 4.3 percent rise in housing prices, respectively.

Real estate industry leaders have already voiced concerns about the central bank’s approach and prolonged interest rate high.

Henning Lauridsen, the head of the Real Estate Norway (Eiendom Norge) organisation, urged Norges Bank to refrain from further interest rate hikes, fearing a housing market crash.

“We believe that Norges Bank must now keep the interest rate steady. With further interest rate increases, Norges Bank risks creating financial imbalances in the Norwegian economy further into the future, says Lauridsen in a comment,” Lauridsen told the newspaper E24.

Carl O. Geving, managing director of the Norwegian Association of Estate Agents (Norges Eiendomsmeglerforbund), expressed worries that a high policy rate may negatively impact new housing projects, predicting a potential drop of 13-14 percent in housing investment by the end of the year.

In his opinion, this will negatively affect the housing supply in the country, which has already become a pain point for many prospective homeowners.

READ MORE: How the housing project freeze in eastern Norway affects future homebuyers

Fears of a wage-price spiral

While the Norwegian economy has experienced a slowdown, the labour market remains strong.

Several financial experts have already warned that rising costs for businesses and the prospect of higher wage costs add to concerns about a wage-price spiral, which would see a self-reinforcing cycle of rising wages and prices.

Next year, Norges Bank expects inflation of 4.8 per cent, up 0.9 percent from its previous monetary policy report.

Core inflation – a measure of inflation that excludes certain volatile and temporary factors from the price growth calculation – is expected to be 4.7 percent next year, up 0.1 percent from the central bank’s previous report.

Norway’s central bank is concerned about how wage growth will feed into inflation.

“It will help to keep price growth up going forward. The longer price inflation stays up, the greater the danger that it will bite. It may then be more expensive to bring the price increase down again later. On the other hand, interest rates have been raised a lot quickly, and monetary policy is now having a tightening effect on the economy. The committee does not want to raise the interest rate more than is necessary to overcome the high price increase,” the bank wrote in an assessment.

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