Price shock increases the risk of five rate hikes this year – E24

After all signs of the sun, the Norges Bank will raise the interest rate to 0.75 percent at its next rate meeting on March 24. It will likely be one of at least four interest rate jumps this year.

– The rise in interest rates will be sharper and higher than what the Bank of Norway has announced so far, said Chief Economist Marius Gunsholt Hof.

Norges Bank raised its interest rate for the second time after the pandemic just before Christmas to 0.50 per cent. At the same time, a new increase was noted in March, as well as two more increases this year.

We are currently sticking to the forecast of four withdrawals this year, compared to the three withdrawals announced by the Bank of Norway. But the danger is reversed.

Immediately after the Russian invasion, there was little doubt in the market whether the March rate hike could be implemented. This has now been reversed.

Retooling ready

– There has been a clear recurrence of the market going up, says the economist, and he explains that Norwegian interest rates are now indicating that market participants see a 50/50, or perhaps just over 50 percent probability of five rate hikes this year, As Günsholt Hof says.

This means that the interest rate will have to be raised at each of the major meetings of the year. In addition, there must be a double increase at one of the meetings, or the bank must resort to the somewhat unnatural move of raising interest rates at one of the intermediate meetings.

From lows in early March, interest rate expectations have been trending higher and higher, with fresh reinforcement yesterday after a sudden rise in inflation in Norway, along with signs of faster tightening from the European Central Bank.

The rising interest rate expectations are partly related to the international recovery, but also to domestic Norwegian conditions with lower unemployment than the Bank of Norway expected, core inflation already above the target in February, and with clear post-war upside risks. The sum of all this means interest rate expectations are rising, the chief economist explains.

Core inflation, i.e. inflation without, among other things, electricity prices fluctuating significantly, is what Norges looks at when setting interest rates. The goal is an inflation close to 2% over time.

To reduce inflation, Norges Bank’s tool is to raise interest rates.

wage pressure

Last year, inflation closed at 3.5 percent. The last time Norway’s inflation exceeded four percent, the year average was in 1990, when the key interest rate was more than ten percent.

On Thursday, it became clear that the parties to the wage negotiations must be based on much higher inflation than previous calculations. In order to increase purchasing power, as requested by Fellesforbundet, wage growth must exceed price growth, which is now estimated at 3.3 per cent.

Higher wages usually lead to higher prices.

Norway’s latest forecast from December with a combined inflation of 2.7 per cent and a wage increase of 3.2 per cent. Interest rates for these expectations peaked at 1.75 percent at the end of 2024. There is a widespread expectation that the central bank will have to adjust these expectations upwards.

– Regardless of the rate hike, the market is looking forward, approaching 2.25 percent already in the fall of next year, says Gunshult Hoff.

Easier for Norway

Swedbank’s Marilyn Granrod notes in an analysis that global central banks have the difficult task of balancing the need to rein in inflation, which was already high before the recent price shock, in an effort to avoid a postwar plunge.

– The Norges Bank and the Norwegian economy are in a better position than others, as interest rate increases are already underway, oil and gas revenues will rise, the krone exchange rate will strengthen since the war broke out, and the government can support some from the rising house costs, she writes.

However, households and businesses will be hit hard by higher prices in the future.

She stressed that inflation will certainly be much higher in the future than was expected a few weeks ago.

Swedbank believes core inflation will remain above 2 percent for the rest of the year, and likely approach 3 percent during the second half of 2022.

– Markets will increase their interest rate expectations in the wake of rising inflation and are likely to start pricing about five hikes this year. Norges Bank would be wise to maintain the gains incrementally, with a goal of making four increases in 2022, according to a Swedbank analysis.