After Kiwi’s Move, Norges Bank May Miss Inflation Target Again, Nordea Economist Warns

The week is not filled to the brim with macro snacks, but two important things are on the calendar for the next few days here at home:

The brokerage industry’s fresh housing figures for May will be released on Monday. And on Friday, new inflation figures will come from Statistics Norway (SSB).

At the same time as Norwegian commodity prices have run wild, the Norwegian krone has weakened further from already record low levels recently. This puts Norges Bank’s interest rate setting under pressure. Now the central bank may have “another stone to add to the burden”, according to chief economist Kjetil Olsen at Nordea Markets.

– So far, history has shown that Norges Bank has consistently missed the downside in its expectations for price growth. We have an idea that they might do it this month too, says Olsen.

In April, Norwegian consumer prices rose 6.4 per cent on an annual basis, with core inflation of 6.3 per cent. Norges Bank has assumed that the latter, which adjusts for tax changes and omits energy products, will moderate to 6.0 per cent.

Nordea Markets does not think so, which predicts that core inflation will rather pick up somewhat – to 6.5 per cent.

– One of the reasons for that is that we believe in extra strong price growth for food, after Kiwi dropped its price freeze, says Olsen.

– Really a headache

It was at the beginning of May that Kiwi abolished its so-called price freeze, also known as a price lock – which was a guarantee from the grocery chain against increased retail prices on close to 250 items.

The guarantee triggered a price war in which Rema 1000 and Coop also saw themselves obliged to keep the prices of several goods in check, despite the much-discussed price jump from suppliers on 1 February.

Now stiffer food prices will be felt in the inflation figures, Olsen believes.

– And if we are right, this will be another significant setback for Norges Bank. It’s getting a bit disgusting for them, says the chief economist.

Olav Chen, head of allocation and global interest at Storebrand, says the devaluation of the krone makes the inflation figures extra important this time.

If the inflation figure comes in high, Norges Bank can announce even more interest rate hikes. And if the inflation figure shows increased imported inflation, which works with a time lag of six months, it will be an indicator that Norwegian inflation will also remain high going forward, he explains.

– The interest rate is the most important weapon for dealing with the weak krona, says Chen.

– The crown is really a headache. If nothing happens with the krone, then three interest rate hikes are likely, he adds.

Are housing prices finally stagnating?

Olsen agrees and expects, like most other economists, that Norges Bank will raise the key interest rate from the current level of 3.25 per cent at the next interest rate meeting on 22 June. From there, he believes in new interest rate hikes in both August and September.

– Then we think it will finally start to bite, he says about the new everyday life for households – and the Norwegian housing market.

Eiendom Norge presents its May report on Monday at 11.00. So far this year, the central bank’s hard interest rate cure has not been able to lower house prices, which rose in both January, February, March and April. The autumn price crash has now come to an end, and broker managers see signs of another price rise in May which could result in a new “all-time high”,

– The housing market has remained surprisingly strong this year, and we are quite confident that the softening of mortgage rules on 1 January has contributed. People have been allowed to borrow more from the bank, we hear of up to 20 per cent extra, and that raises prices. But for every quarter the interest rate increases, home buyers must be stress tested at a higher pain threshold. We think this is starting to bite now, says Olsen.

Five percent price drop

He does not dare to predict individual months, but expects up to a five per cent fall in house prices this autumn.

Otherwise, investors on American stock exchanges will spend the first trading days of the week digesting Friday’s surprising labor market report from the United States, Chen believes.

339,000 new non-agricultural jobs were created in the US last month, the figures often called “the most important of the month” show – well above expectations for 195,000 new jobs. At the same time, unemployment has risen more than expected.

At the same time, President Joe Biden has signed a new law that raises the US debt ceiling, thereby preventing what could have been the country’s first national debt default on 5 June. Chen emphasizes that the market has priced in the lifting of the debt ceiling.

– At the same time, I believe that the market will react positively to the week, when the so-called “tail risk” for that to happen is gone, says Chen.