– Most central banks are in a panic – E24

– We are in a period when it is difficult to predict anything, either how the development will be or how the central bank will react, Swedbank chief economist Kjetil Martinsen tells E24.

On Thursday, Central Bank Governor Ida Walden Bach will present the Norges Bank’s interest rate decision.

Interest rate increases of 0.5 percentage point, 50 basis points, were not common in Norway. In June, Norges raised the interest rate from 0.75 percent to 1.25 percent, and it was the first time in 20 years that we had a 0.5 percentage point rate increase.

50 is the new 25

Before the interest rate meeting Swedbank writes That “50 is the new 25”. The bank’s macroeconomists write in the report that they expect interest rate increases of 50 basis points, or 0.5 percentage point, in both August and September. Then they expect increases of 0.25 percentage point in November and December.

– It’s because of the summer twist. The NAV figures showed that unemployment is lower than the Norges Bank had assumed, so it indicates strong labor demand. This again means wages can go up, and that price pressure can be maintained, says Martinsen.

At the previous interest rate meeting in June, the Bank of Norway announced that the rate would be raised by 0.25 percentage point in August. The Bank of Norway, in its forecast for the main interest rate, expected that the interest rate would be raised to 3 percent until next summer.

Forced to act more forcefully

In the report, Swedbank writes that the Norges Bank was among the first western central banks to raise interest rates last fall. They refer to it as a phased approach after the economy stabilized quickly after the pandemic.

However, the bank believes that in recent months, the Norges Bank has fallen off the curve when it comes to monetary tightening. Low unemployment and higher core inflation mean that the Norges Bank is forced to act more aggressively, according to Martinsen.

Norges Bank is between taking a bit of a crack at it now, or risking that the inflation problems will get bigger over time. And then it’s easier for Norges to raise rates twice, despite announcing 25 basis points at the previous meeting, says Martinsen.

There is no simple recipe

We have moved to a point where most central banks are in a panic, thinking about how to reduce inflation without stifling the economy. There is no simple recipe for this problem.

According to Martinsen, it may be necessary to send the economy into recession in order to control price inflation.

Then inflation can be reduced by weakening the labor market and wage growth. But it’s not something you want. A so-called soft landing requires precision in political tools that is nearly impossible, he says.