Norges Bank Annual Letter 2023: Interest rates are at their peak

The stubborn rise in prices continues to spread terror.

It was in January Core price inflationCore price inflationIn basic price growth, tax changes, electricity and fuel are excluded. This fluctuates up and down outside Norges Bank's control. 5.3 percent compared to the same period last year. Norges Bank is still far from its target of 2 percent annual price growth over time.

On Thursday evening, Central Bank Governor Ida Welden Bache will deliver the traditional annual speech at Norges Bank. Here she presents the central bank's view on Stoda – a kind of paternalistic conversation for the Norwegian economy.

She has more to talk about than usual.

Professor Ragnar Torvik at NTNU sees no reason for Bash to moderate his rhetoric, despite the fact that prices are not doing well.

It is necessary to look up.

– Despite 14 consecutive interest rate increases, the labor market is very good. He says this shows that Norges Bank is prioritizing very low unemployment rates and taking too long to bring down inflation.

Torvik chairs the government's expert committee on fiscal policy, which advises on economic policy.

Great hope

High interest rates, high price growth and wage growth that lags behind. It is an expensive time for Norwegian families.

It has political consequences. On Monday, Prime Minister Jonas Gahr Sture (AFP) met with parties in working life ahead of the spring wage settlement. They talked about their hopes.

We talked about the economic outlook, and that there is hope that we will see prices and interest rates on their way to decline, and that there is hope that we will be able to increase people’s purchasing power, as he told NTB.

Will Walden Bach's speech promote hope?

The ghost lives

In front of last year's annual report, E24 wrote article With the title “This year Bash has to bury an old ghost.”. The specter was high inflation.

The ghost is back after last appearing in the 1980s. In the years 1970-1988, price increases exceeded 5 percent annually, except for one year.

The ghost wasn't buried a year ago, and it's still here.

This is despite the fact that the annual increase in basic prices fell from 6.4 percent in January last year to 5.3 percent in January this year.

Award fighters in all countries

Bash can feel relieved that she's not alone. Throughout the Western world, price inflation has long been above targets set by central banks.

Torvik says the foreign cocktail with more ingredients is what pushed him soaring.

– As a result of the pandemic, supply chains from China have been disrupted. The invasion of Ukraine sent energy prices soaring. He says these turmoil have caused minor currencies to weaken as global money flows struggle against major currencies such as the dollar and the euro.

Small countries with small currencies are also those with the largest trade.

The krone has weakened for two years, making imports more expensive and keeping Norwegian price growth high. Torvik says there was limited what Norges Bank could do with this, short of raising the interest rate higher.

High price growth and high interest rates

In the annual report in February last year Norges Bank forecast The basic price increase should have been 5.2 percent last year, calculated as growth from the previous year's average.

The day is over 6.2 percent. This was the highest growth measured since core price growth began in 2001.

Norges Bank may have seen where things were going along the way, and peak interest rates rose quickly last year:

• In his recent annual speech, Bash predicted that the interest rate would be just below 3% on average for this year.
• When she took the podium on Thursday evening, her estimate for this year's interest rate was 4.5 percent. This already got there at the December interest rate meeting.

Synchronized Norges Bank Books: “The interest rate is likely to be close to the level required to bring price growth to the target within a reasonable period of time.”

Long at the top

Therefore, it is likely that interest rates will have peaked in December. It looks set to remain there for almost all of 2024.

– High prices have proven difficult to achieve, Torvik says.

He recalls that voices in the debate accused Bash of being too hawkish on interest rate increases.

If they had kept interest rates low, the problem of rising prices would have been greater. The strengthening of the krone after the interest rate increase in December shows that the interest rate affects the krone exchange rate. This also affects price growth through cheap imports, Torvik says.

Interest on housing is at its peak

The interest rate on housing is what matters to ordinary people. These days it reaches its peak when the banks' two-month notice period ends.

Norges Bank's estimate this year is 5.7 percent on average, which is largely flat throughout the year. This is much higher than last year.

However, Prime Minister Storr will have to wait until next year before his hopes for “interest rates on the way down” come true as soon as possible.

During the speech, Storr will likely sit in the front row. Bash can send him hope from the bank Latest forecastsWage growth will be higher than price growth this year.