It is in DNB Market’s morning report on Tuesday that we can read about the gloomy forecasts, at least if you have a loan. People with money in the bank can rejoice, while borrowers with a typically large mortgage can fear that the mortgage will soon become NOK 20,000-30,000 more expensive a year.
Chief economist Kjersti Haugland in DNB Markets writes in the report that the markets are pricing in (read: waiting) that Norges Bank will raise the interest rate by a new 0.50 percentage points both on Thursday next week and in September. In total, we are therefore talking about 1 percentage point. That is a lot, and a long way from Norges Bank’s previous statements about gradual increases.
It also contrasts with what the central bank said in June.
– There is not a hundred percent probability, but there is a clear preponderance, says Haugland to Nettavisen about what may happen in the interest rate market in the next month and a half.
Read also: Bad news for borrowers: This interest rate has not been higher for ten years
Beautiful
In the US, you can read more directly what exactly the market expects from future increases.
– Here in Norway there is a good deal of beauty. But what we see from the money market interest rates is that they are priced in at more than 0.40 percentage points in both August and September. We ourselves are in the thinking box, says Haugland.
Tomorrow’s figures for price growth in Norway may be decisive, we shall return to that.
Should there be a double increase for two months in a row – 1 percentage point – we have to go all the way back to August 1998 to find such a strong increase in such a short time. But at that time the interest rate was set to control the krone exchange rate, it was a completely different interest rate policy.
The sad thing for the borrowers is that the market has been more right about the interest rate increases than official forecasts have been, such as the Norwegian interest rate increase in June.
It is normal for Norges Bank to change the key interest rate by 0.25 percentage points at a time. The policy interest rate is the interest the banks receive on their deposits in Norges Bank according to fixed quotas. The central bank therefore decided to double interest rates in June.
– Then they were very specific that such an increase was a one-off. They said outright in the press release that the next increase in August would most likely be 0.25 percentage points. But now the probability of the double has increased, says Haugland.
Also read: This is how you can mitigate the interest rate shock: – The tax will be reduced
Big deviation
– And why does it have that?
– The price increase in June was higher than expected and two tenths above what Norges Bank itself had expected. In July, this discrepancy may be even greater, perhaps by six tenths. The labor market is also even stronger than Norges Bank has envisaged. We also see that both the short-term and future prices for electricity and gas have doubled this summer.
The experts believe on average an annual increase in the underlying price increase in Norway (see below) of 3.8 per cent. Norges Bank, on the other hand, has predicted a decline to 3.2 per cent in July, but followed by a jump to 4.2 per cent in August.
This summer there have been sharp interest rate increases in both the US and Europe. It can be bad news for borrowers here at home.
English surprise
– How important to Norges Bank are the strong interest rate increases internationally?
– Since the last time, bigger steps have been taken outside, and I think it can have some influence. The Bank of England recently believed in an increase of 0.50 percentage points, despite the fact that they imagine that the economy is on the way down.
– The European Central Bank was very clear ahead of its meeting on its plan to increase the interest rate by 0.25 percentage points, but it turned out to be double. In the US, the central bank may strike in September with a third triple interest rate increase in a row. Strong interest rate increases are today’s tune, Haugland asserts.
The main problem at home is the underlying pressure in the Norwegian economy. It’s simply going too well, the companies can’t get hold of enough people, and this pushes up wages. The government is reluctant to be too generous with the electricity subsidy so as not to increase the pressure on the economy further.
Also read: Chief economist warns of horror series with interest rate increases
Increasing pressure
According to Haugland, the underlying price increase, i.e. excluding energy products, is rising sharply. At the top are the negative effects from the war in Ukraine. Core inflation in a country is very important when central banks assess interest rates.
Most – including Norges Bank – have a target that this price increase over time should be close to 2 per cent. In July, it was probably around 4 per cent. Interest rates must then rise. The rise in prices and the pressure must be reduced by cooling the economy with higher interest rates after Norges Bank increased interest rates during the corona pandemic.
– The strong upswing affects Norges Bank and all central banks and has triggered interest rate increases, says Haugland about core inflation.
DNB expects an unusually large price jump for foodstuffs in July in the wake of the agricultural settlement. It produced extra large increases this year after large and widespread cost increases for farmers.
It calms down
If there is any consolation for nervous borrowers, the interest rate market does not believe that Norges Bank will continue to step in with double interest rate hikes for a long time to come.
– Yes, the market does not envisage 0.50 percentage points at all meetings. After the meeting in September, things calm down, says Haugland.
So far, DNB Markets believes that the policy rate will peak at 2.75 per cent in March next year, Norges Bank itself estimates 3 per cent. A typical mortgage is approx. 1.5 percentage points higher than the key interest rate, the best loans down to 1 percentage point higher.
Also read: Settles with Rødt: – Would have given us a higher interest rate and more expensive electricity
Over 4 percent
You must therefore prepare for interest rates above 4 per cent next year on your mortgage if the forecasts are correct. Today, the average interest rate is just under 3 percent.
If you have an annuity loan – which the vast majority have of NOK 3 million to be repaid over 25 years, the monthly amount increases from well over NOK 14,000 to over NOK 16,000. After tax, the increase is not as bad, as you get a deduction of 22 percent. For every NOK 1,000 in increased interest burden, the state pays NOK 220.
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