The price increase is at full speed downwards and Norges Bank is in the process of reaching the target of a 2.0 per cent price increase. Then there is no reason to keep the policy rate at a sky-high 4.5 per cent any longer.
THE INTEREST HAWKS: This is the committee in Norges Bank that decides the interest rate – Pål Longva, Steinar Holden, Ida Wolden Bache, Ingvild Almås and Øystein Børsum. Photo: Norges Bank
Do you remember a year back in time? At the time, there was only one argument for the high Norwegian interest rates, and that was the goal of reducing price increases. Since then, a new goal has crept in, namely to keep the krone exchange rate strong. But that is not Norges Bank’s job.
At the meeting just before the weekend, Norges Bank decided to keep the policy rate unchanged at 4.5 per cent, and announced that it would remain this way for the rest of the year.
Norges Bank believes that high interest rates are still necessary to reduce price inflation, even if prices have increased less than the bank thought. It comes at the same time as our most important trading partners have reduced their price growth.
Today new figures came from Statistics Norway, which show that the annual price increase has fallen from 3.0 to 2.6 per cent from September to October.
At the same time, the krone exchange rate has strengthened when measured against a so-called import-weighted exchange rate index – that is, an exchange rate where the krone is measured against an average – a “basket” – of the currencies of the most important countries we trade from. The most important currency is the euro, and it is weaker against the Norwegian kroner now than a year ago.
THE KRON HAS STRENGTHENED: The graphic shows how many Norwegian kroner we have to pay for a “basket” of currency from the countries we import from. The graphic shows that we get roughly the same amount for the krone now as a year ago. Last year we had to pay NOK 123.2 – right now the price is NOK 121.6. Photo: Norges Bank
Interest matters less for exchange rates
Classical economic theory states that there is a clear connection between exchange rates and the level of interest rates – so-called interest rate parity. Put simply, the theory says that higher interest rates raise the exchange rate.
In reality, the connection is weaker than before. The reason is, among other things, that investors assess risk and take into account expectations for future economic development and political conditions.
Norway has high interest rates and a low exchange rate. This may be due to distrust of the government’s economic policy and not least the tax policy, which has sent some of the country’s best business people headlong out of the country.
Conclusion: A desire for a stronger krone is a poor argument for getting Norges Bank to hold back on high interest rates.
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Consumer debt and indebted municipalities
Both ordinary people and municipalities are borrowing money like never before, and the flip side of the coin is heavy interest costs:
- Norwegians have over NOK 170 billion in consumer debt, which is NOK 11 billion higher than at the start of the year. Such debts are often a sign that people have taken on debts they are struggling to service.
- At the same time, the municipalities have well over NOK 625 billion in debt. This is a fourfold increase since 2000, and municipal debt is increasing much faster than income.
While more and more municipalities and county councils are closing schools and cutting other public benefits, more and more of the tax money is going to pay interest. The violent interest rate increases are just as bad for people with a lot of debt.
HIGHEST INTEREST RATE IN 15 YEARS: We have to go back to the financial crisis to find an equally high policy rate. Photo: Norges Bank
Little pressure in the economy
The main argument for keeping interest rates high is to reduce the pressure on the Norwegian economy. But even there there are signs that show that the pressure is lower than it apparently looks like:
- Growth in the Norwegian economy is low and high interest rates have held back people’s consumption.
- Fewer new homes are built, partly because developers fear interest rates.
- Unemployment has increased to 2.1 percent, and unemployment among Ukrainian refugees is underestimated.
The big question is whether the Norwegian economy can withstand higher demand, and whether it will bring more people into the labor market – whether it is about those on sick leave, the disabled with residual work capacity or whether the nearly 50,000 Ukrainian refugees between the ages of 20 and 66 can enter working life more quickly.
Read Norges Bank’s reasoning: Monetary policy assessments
More in work, better for people with debt
There are many good arguments for lowering interest rates, and especially for a government that is allegedly concerned with reducing economic differences. Lower interest rates are a handshake for people with high debts and for municipalities with poor finances.
Norway has accepted around 50,000 adult Ukrainian refugees, and only 1/3 of them are in work. Even after two years, less than half are in work, shows figures from Statistics Norway.
The requirement to be counted as being in work is no higher than that you are registered as a wage earner – i.e. that the employer has reported salary and position information – no matter how much you work. On average, those who are considered employed have a vacancy rate of around 75 per cent.
The statistics also show that almost 60 per cent of the Ukrainian refugees have found a job, while only 44 per cent have a job after two years of residence.
Conclusion: Among Ukrainian refugees there is a large untapped reserve of labor.
Therefore, there will be an interest rate cut in the new year
There are several reasons for Norges Bank to lower the interest rate in the new year:
- The price increase is falling towards the target of 2.0 per cent and there is low inflation abroad.
- The Norwegian krone is relatively stable, so no risk of more imported price increases.
- The pressure on the Norwegian economy is decreasing with increased unemployment and low economic growth.
When you read the justification from Norges Bank, the choice of words is a little hawkish, even though the interest rate meeting took place after Donald Trump’s election victory. The assessment focuses almost exclusively on the need to cool down the economy, so that inflation continues to fall.
The central bank has now bought itself time until the new year, but in the election year 2025, the public pressure to bring down interest rates will increase. Even Norges Bank is influenced by the outside world, and the pressure will increase in the run-up to the interest rate meeting in March.
Norges Bank: Interest Madness or Just Plain Bad Luck?
Ah, Norges Bank—those economic brainiacs fighting the good fight against inflation as if they’re battling a particularly stubborn Norse deity. You’d think they were fending off trolls rather than managing interest rates! The official line is that prices are doing a high-speed downward dance, and for the time being, they see no reason to lower the policy rate from its sky-high 4.5% perch. But let’s say it all together now: “Why?”
The Interest Hawks: A Comedy of Errors?
Meet the illustrious committee—Pål Longva, Steinar Holden, Ida Wolden Bache, Ingvild Almås, and Øystein Børsum—flying high on interest rates like they’re auditioning for a skydiving competition. Could they consider parachuting down to a more reasonable rate soon? The focus was once on reducing price increases, but alas, a new goal slipped into the picture: keeping the krone exchange rate strong. A policy shift akin to looking for a sunny patch in a Norwegian winter!
The latest reports show that inflation is cooling—falling from 3.0% to 2.6% in a matter of weeks. Someone get the party hats! Meanwhile, the krone is playing the strongman against other currencies. It’s like watching Norway’s economic version of Gladiator: “Are you not entertained?” But let’s calm our celebrations; just because prices are easing doesn’t mean the bank’s hawks are ready to roast their primary concern: high interest rates.
The Krone’s Strength: Is It All Just a Glimmer?
According to classical economic theory, a higher interest rate should mean a stronger krone. Apparently, someone forgot to send the memo to reality, because the connection appears to be about as solid as a paper boat in a storm. Investors are pricey date-watchers nowadays, assessing risk rather than taking a gamble on a high-interest buffet. With so many dear friends fleeing the country due to questionable tax policies, is it any wonder confidence is in short supply?
Conclusion: A yearning for a stronger krone is about as good an argument for holding high interest rates as using a sock for a boxing glove. Not a knockout approach!
Debt: A Heavy Burden for All
Step right up and witness the staggering numbers: Norwegians are now racking up over NOK 170 billion in consumer debt. Just be careful—this is the kind of growth that could make your head spin! Meanwhile, municipalities are digging themselves a hole with over NOK 625 billion in debt. While the schools and public services are closing down faster than an IKEA store on a Sunday, interest payments soar through the roof like a fevered dream. Talk about a real-life horror story!
Yes, the rates are at a staggering peak not seen since the financial crisis, which is rather like saying “this is the worst it’s been since… oh, you remember that time?”
Is There Even Pressure in the Economy?
The main argument for keeping rates high is to reduce pressure on the economy. But that pressure seems about as real as a unicorn sighting. With growth slowing and unemployment creeping up to 2.1%, we might as well call this an economic spa day—but not the relaxing kind. Fewer homes are being built, and the fear of rates is palpable. It’s clear: we might be tightening our belts, but the economy seems to be getting a little too comfy on the couch.
Who knows? Perhaps the underutilized pool of Ukrainian refugees could be drawn into the labor force. After all, isn’t the real comedy in planning a future with so many available hands? Oh, wait—how many are actually in employment after two years? Let’s not even get started on that bit!
Why Lowering Rates is Key
As we gaze into the crystal ball of economic possibilities, here’s what we see in the new year:
- The price increase is deflating to the target of 2.0%, and internationally, inflation is chillin’ out as well.
- The krone is as steady as a Norwegian in the winter, so no apparent risk of nasty imported price rises.
- The pressure on the economy screams ‘calm down’ with rising unemployment and low growth.
Nothing screams confidence like an economy that’s just slightly less nervous than a cat in a room full of rocking chairs. Don’t worry though—by the time March rolls around, public pressure will be mounting faster than a funfair ride!
So, as we ponder the economic tightrope that is Norges Bank, the message is clear—lowering rates doesn’t just make sense; it feels rather like a warm hug from the financial community. Because ultimately, who doesn’t want a future where interest rates don’t suffocate us while we’re trying to deal with our debts?
Final Thoughts
As we await the next bold move from the hawks of interest, remember this: the economy, much like a stand-up routine, can change, flip, and keep us guessing. Let’s raise a glass (or perhaps lower a rate), to a more stable and prosperous Norwegian future. Cheers!
The downward trend in price increases is accelerating, and Norges Bank is actively working towards achieving its target inflation rate of 2.0 percent, prompting questions about the continued necessity of an elevated policy rate set at 4.5 percent.
Do you remember a year back in time? At the time, there was only one argument for the high Norwegian interest rates, and that was the goal of reducing price increases. Since then, a new goal has crept in, namely to keep the krone exchange rate strong. But that is not Norges Bank’s job.
At the recent policy meeting held just before the weekend, Norges Bank opted to maintain the policy rate at 4.5 percent, making it clear that this stance would persist for the remainder of the year.
Statistics Norway released new figures today indicating a decline in the annual price increase from 3.0 percent to 2.6 percent between September and October. This shift suggests a positive development in price stabilization.
At the same time, the krone exchange rate has strengthened, particularly when evaluated against an import-weighted exchange rate index, which considers an average of currencies from crucial trading partners; notably, the euro has weakened against the Norwegian krone compared to last year.
Interest matters less for exchange rates
Classical economic theory states that there is a clear connection between exchange rates and the level of interest rates – so-called interest rate parity. Put simply, the theory says that higher interest rates raise the exchange rate.
Norway has high interest rates and a low exchange rate. This may be due to distrust of the government’s economic policy and not least the tax policy, which has sent some of the country’s best business people headlong out of the country.
Conclusion: A desire for a stronger krone is a poor argument for getting Norges Bank to hold back on high interest rates.
- Norwegians have over NOK 170 billion in consumer debt, which is NOK 11 billion higher than at the start of the year. Such debts are often a sign that people have taken on debts they are struggling to service.
- At the same time, the municipalities have well over NOK 625 billion in debt. This is a fourfold increase since 2000, and municipal debt is increasing much faster than income.
While more and more municipalities and county councils are closing schools and cutting other public benefits, more and more of the tax money is going to pay interest. The violent interest rate increases are just as bad for people with a lot of debt.
Little pressure in the economy
The main argument for keeping interest rates high is to reduce the pressure on the Norwegian economy. But even there, there are signs that show that the pressure is lower than it apparently looks like:
- Fewer new homes are built, partly because developers fear interest rates.
- Unemployment has increased to 2.1 percent, and unemployment among Ukrainian refugees is underestimated.
The big question is whether the Norwegian economy can withstand higher demand, and whether it will bring more people into the labor market – whether it is about those on sick leave, the disabled with residual work capacity or whether the nearly 50,000 Ukrainian refugees between the ages of 20 and 66 can enter working life more quickly.
Read Norges Bank’s reasoning: Monetary policy assessments
More in work, better for people with debt
Lower interest rates are increasingly viewed as a necessary measure, especially by a government that claims to be focused on alleviating economic disparities. Such reductions would serve as a lifeline for those grappling with significant debt, as well as for municipalities striving to manage their financial difficulties.
Statistics indicate that Norway has accepted around 50,000 adult Ukrainian refugees, yet only about one-third are currently employed. This raises concerns about the integration of these individuals into the workforce over the past two years.
Statistics also show that almost 60 percent of the Ukrainian refugees have found a job, while only 44 percent have a job after two years of residence.
Conclusion: Among Ukrainian refugees, there exists a significant reservoir of untapped labor potential.
Therefore, there will be an interest rate cut in the new year
Several compelling reasons support the notion that Norges Bank may opt to lower interest rates come the new year:
- The price increase is falling towards the target of 2.0 percent and there is low inflation abroad.
- The Norwegian krone is relatively stable, so no risk of more imported price increases.
When the latest justification from Norges Bank is analyzed, a cautious tone is evident, reflecting a focused concern on curbing inflation. The bank has effectively secured time until the new year; however, public pressure to reduce interest rates is likely to intensify in the lead-up to the 2025 elections.
“_blank” href=”https://www.norges-bank.no/en/Monetary-policy”>here.
The Argument for Lowering Rates
As we look forward into the coming months, it becomes increasingly clear that a lower interest rate may be what Norway needs:
- With inflation trending down to the target of 2.0%, there’s little reason to keep interest rates at such a high level.
- The krone’s strength appears sustainable, posing no threat of disruptive imported inflation.
- Current economic indicators, such as rising unemployment and slowing growth, suggest that the economy benefits more from increased spending than prolonged high interest rates.
In essence, lowering interest rates would provide a more balanced approach to fostering economic growth while still keeping inflation in check. By easing the burden on consumers and businesses, we can stimulate demand and keep the economy vibrant.
Final Reflections
As we await the decision from the interest rate hawks, let’s consider the broader implications of their policy choices. The economic landscape, much like a well-crafted joke, can turn unexpectedly. Let’s toast to potential policy shifts that might align more closely with the current economic reality. Here’s hoping for a more accommodating interest rate environment soon—because after all, who wants to feel suffocated by financial pressures when we can look forward to a more prosperous future? Cheers to that!
