Doubts about interest rate cuts in 2024 – E24

– It is not unlikely that the Norwegian Bank will end up postponing interest rate cuts until 2025, says its chief economist.

Most of Norway's major banks expected interest rate cuts of between two and three in 2024. So did Handelsbanken, which has three cuts in its official forecast.

Meanwhile, Chief Economist Marius Gunsholt Hof states that the situation could change quickly.

– I will actually be keen to ensure that interest rates are lowered this year, he tells E24.

doubt

Norges Bank announced an interest rate cut at the end of 2024.

– Admittedly, interest rate cuts are the main expectation of both Norges Bank and US analysts, and the interest rate market is also looking forward to cuts in the future. But notice how quickly things can shift, Hof says.

He notes that the interest rate market was “right and very optimistic” at the beginning of the year. The market then expected that the interest rate would be cut a full six times in 2024.

These forecasts have now moderated significantly.

The chief economist says the market believes the first rate cut will take until the end of the summer, and that there are now just over three rate cuts priced in for the second half of the year.

– In this case, it is more in line with the official forecast for us at Handelsbanken. But to be honest, I have little doubt whether the interest rate will actually be cut this year.

– An ugly reminder

New US inflation figures were released on Monday.

Price growth in the world's largest economy in January reached 3.1 percent, while economists expected inflation to slow to 2.9 percent, according to a survey conducted by Bloomberg.

The latest US inflation numbers were an ugly reminder that the inflation battle is long and difficult, says Hof.

He believes the “last mile” is about driving prices all the way to the target 22The US central bank, the Federal Reserve, like Norges Bank, aims to keep price inflation at around 2 percent over time.It may turn out to be much longer than the first drop in inflation numbers left.

Here at home, we are seeing much of the same, plus the fact that core inflation remains below the peak we have seen among many trading partners.

It may take until 2025

In January, defeated Core inflation Core inflation Core inflation (CPI-JAE), also called core inflation, is adjusted for tax changes and without energy products. This is also Norges Bank's preferred indicator of price growth. In Norway, 5.3 percent.

– Although it was as expected, we noticed that the increase in prices for goods and services produced in Norway was clearly higher than expected, says Hof.

He points out that price growth here has more or less stopped since the fall of 2022.

This, coupled with the prospect of higher wage growth in 2024 and the fact that expectations of interest rate cuts internationally are being pushed further and further in time, means it is not unlikely that the Bank of Norway will end up postponing interest rate cuts until 2025, says chief economist .

Great on wheels

Hof hears his views from interest rate strategist Lars Moland at Nordea.

The bank has two rate cuts in its official forecast for 2024, but is now working on new cuts.

– What do you think is the danger of not lowering interest rates this year at all?

-I think it's too big. The Bank of Norway needs a stronger krone exchange rate to reduce price inflation. Then it is needed Positive interest rate differentialPositive interest rate differentialInterest rates in Norway are higher than abroad To the United States and Europe, Moland says.

-He has a long way to go

In addition, this year's salary settlement is set to be difficult.

– This makes it more difficult for Norges Bank. It is not unlikely that the wage adjustment will reach 5.5 percent. Then service companies will find themselves forced to raise their prices, and service inflation will rise.

Meanwhile, rising commodity prices in Norway have not fallen as much as internationally, where they have now fallen almost to zero, Moland points out.

– Commodity prices are largely related to the krone exchange rate. Norway also has higher price growth than G10 countriesG10 countriesA group of countries in the International Monetary Fund consisting of Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom and the United States.. Interest rate strategist says Norges Bank has a long way to go.

After the US inflation figures were released on Monday, the Norwegian krone weakened against major currencies such as the dollar and the euro.

-What does it take to get permanent corona strengthening?

-Interest rates must fall abroad. After yesterday's inflation numbers, I think we can also ask whether interest rates will be cut in the US this year. If we don't get discounts in the US, we won't get discounts in Norway. “We need a bigger spread in interest rates abroad,” Moland says.

Increase prices without increasing costs

In January 2023, core inflation in Norway was 6.4 percent.

– This year it was 5.3 percent. Why is it taking so long to reduce core inflation, or are we just impatient?

– Price inflation is likely to continue to decline. But Norges Bank looked into it a bit, and even industries that didn't see fundamental cost growth set prices, Moland says.

He emphasizes that there are also industries that have seen real cost increases.

But perhaps the most surprising thing about January's inflation numbers was that only one category was driving price growth higher.

– Regarding the upcoming interest cuts, what positive news can we take with us?

– Say that. They are actually not easy to find. The positive thing is that we tolerate high interest rates well. Neither the sale of goods nor the housing market stopped completely.