There are thus many indications that the key policy rate will increase from 0.5 to 0.75 per cent on Thursday.
– The starting point is that the interest rate is very low. It is much lower than the normal level for Norges Bank, which means that monetary policy is very expansionary, says senior economist Kyrre Aamdal in DNB to NTB.
He points out that there is a high level of activity in the Norwegian economy, at the same time as inflation is rising. Thus, there is no need for the central bank to stimulate the economy to the same degree.
– In light of strong inflation figures, one might have feared an interest rate increase of 0.5 percentage points, but we do not think it will happen, says Aamdal.
Omikron caused concern
He points out that too rapid interest rate increases can have a negative effect on the economy. Instead, Norges Bank is expected to raise interest rates by a quarter of a percentage point in each quarter in 2022, as well as the first two quarters of 2023, so that it ends up with a key interest rate of 2 per cent.
In a monetary policy report in December 2021, Norges Bank announced three interest rate increases in 2022, at a time when there was great uncertainty associated with the omicron variant of the coronavirus and new shutdowns. As the corona situation no longer affects the Norwegian economy to any great extent, economists have in recent months predicted that there will be four interest rate increases this year.
– Then there is a new uncertainty in the picture in the form of the war in Ukraine. So far, the economic consequences of inflation are rising, while economic activity is falling slightly. When there is rising inflation, also in the countries around us, there is reason to believe that Norges Bank emphasizes this, says Aamdal.
The krona is strengthened
Rising oil prices have also led to the Norwegian krone strengthening in recent days, which leads to an additional concern for Norges Bank as an increase in interest rates may mean weakened competitiveness for Norwegian industry.
Even if there is a need to tighten monetary policy, this does not mean that growth in the Norwegian economy will be slowed down, says the DNB economist.
– It indicates that you should proceed a little cautiously. The assessment is that 0.25 percentage points in the quarter can be compatible with good development while at the same time bringing interest rates to a normal level.
Ukraine creates dilemma
The war in Ukraine creates a dilemma for Norges Bank. The uncertainty makes it difficult to assess the effect of interest rate changes on inflation, and whether production patterns change.
For households, the effects of the interest rate increase will vary. It is expected that there will be relatively high wage growth in Norway this year, which despite high inflation will lead to a certain real wage growth – ie that the purchasing power of households will actually increase. It also contributes to more and more people coming to work. If you have high debt, however, it can tip the other way.
– We still believe that most households will be able to handle the situation even if they have high debt, precisely because there will also be wage growth and an increase in employment. It is worse if interest rates rise at the same time as people lose their jobs, says Aamdal.
Other banks also expect an increase
Other banks’ economists also predict an interest rate increase of 0.25 percentage points.
– The war in Ukraine has led to a sharp rise in prices for everything from energy, electricity, raw materials, food and materials. It is difficult to quickly increase the production of energy, food and raw materials in the short term, so we must therefore expect a longer period of high price growth, says consumer economist Elisabeth Holvik in Sparebank 1.
Nordea writes in its to analyse that the interest rate will not only increase from 0.5 to 0.75 percent on Thursday, but that it will increase to 2.5 percent by the end of 2023.
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