Central banks in rich countries raised interest rates faster than at any time since the early 1980s, after inflation reached its highest levels since then and unemployment reached its lowest levels. The number of job vacancies and vacancies reached a record high and the employment rate was a record high in most countries.
Harald Magnus Andreassen (Photo: Elin Høyland)
There is a lot to worry about in this world, but the “crisis” in our economies is that the level of activity has become too high, and it remains so. We’ve seen worse crises than that.
The first part of the inflation shock is due to increased margins at companies. They were able to raise prices because demand for the goods reached record levels during the pandemic. Never before have global commodity chains produced, transported or sold more. But demand has been stronger, buoyed by zero interest rates and large budget transfers to the private sector.
Then we had bad luck with energy prices in Europe after Putin turned off the gas tap.
When the service sector started, labor shortages became precarious everywhere. This has led to a sharp rise in wage growth everywhere. It is also the fastest since the 1980s.
There were understandable “excuses” that inflation was imported, clearly a common inflation shock. But not everyone could blame others, and all central banks joined in the manipulation of interest rates. This contributed to lower overall price growth. Margins that used to be very high are now going down. First because energy and commodity prices fall and then because commodity prices generally stabilize when demand slows.
But the problem of inflation remains, because wage growth has become high, while productivity growth is meager everywhere. The case for curbing demand becomes clearer on a country-by-country basis.
Norway is not in a special position, although the composition of wages is more uniform than in other countries thanks to the front-line model. Over time, we bear more pressure on the labor market than most. It’s a feat. But here, too, there is a clear relationship between wage growth and labor shortage.
Nor does experience indicate that wage growth will decline on its own, thanks to the front-line theme. It needs help from a less tight job market.
If the exchange rate weakens, the front line is also not necessarily able to break the price and wage spiral, as the analysis manager Øistein Røiseland appears at Norges Bank in the latest issue of Samfunnsøkonomen. A current issue, of course.
Although it’s not like the impact on the krone exchange rate with interest rates – as we’ve seen again in recent days, Norges Bank has had pretty good cards when setting the interest rate. Channel effects more than the exchange rate, primarily through demand.
Norges Bank has been criticized, particularly by the LO, for not taking staffing into account. The bank can, of course, miscalculate. But the Bank accepts a significant deviation from its five-year inflation target, averaging two percentage points per year, because it clearly does not want to weaken the real economy too much.
The bank “plans” to increase marine unemployment from 1.6 percent last year, which was near its lowest level since 1980, to 2.4 percent.
There may be different opinions about how low the unemployment rate is in Norway, and it is not stable anyway, but in any case it is not much less than 2.4 percent. From 2000 to 2019, the average unemployment rate was 2.9 percent and the median was 2.8 percent. Other central banks have estimates very similar to those of the Bank of Norway.
Central banks care much more about employment than inflation than all standard models of monetary policy suggest. Banks have reasons to be careful and take time to help. We don’t know how “normal” interest rates will affect the economy, after nearly 15 years of the lowest interest rates in history.
In Norway in particular, there is cause for concern:
- Households have more debt in relation to income than any other country, and only floating interest. The income impact of interest rate increases is significant for those with the highest debt.
- Housing construction has already fallen sharply, consumer spending is lower than it was before the pandemic, and credit growth is slowing.
- Unemployment has risen for ten consecutive months, but only from 1.6 percent to 1.8 percent.
So, I thought “a quarter” could have been a sufficient rate hike last week, and I was surprised, like the market, by how much the Bank of Norway raised the rate path.
But of course I understand Norges Bank’s fear of rates, and so I’m not surprised. Having repeatedly raised the interest rate path sharply, I am confident that the Bank will also redraw the map from now on, adapting to the terrain.
If the economy declines too quickly, the Bank of Norway will follow suit.
However, it is unlikely that everything will be the same as before. Those who benefited greatly from the lowest interest rates in history cannot count on preserving their gains when interest rates double or triple to stabilize the economy. But it is not the job of the central bank to keep real estate prices at their highest levels in history, as measured against other prices, income or rental income in perpetuity.(conditions)Copyright Dagens Næringsliv AS and/or our suppliers. We’d like you to share our statuses using links that lead directly to our pages. Reproduction or other use of all or part of the Content may be made only with written permission or as permitted by law. For more terms see here.
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