The professionals in the fixed income market are more pessimistic than Norges Bank.
The important three-month money market rate (NIBOR) has not been higher since April 2020 and is now at approx. 0.80 percent.
The interest rate is absolutely decisive for your mortgage interest rate, since this is the interest rate at which the banks themselves lend money. The higher it is, the more expensive it is for the banks to borrow money, an increase they are happy to compensate for raising the interest rate to the mortgage customer.
Perhaps the market’s most important benchmark interest rate has risen sharply (see graph below) in line with the announced interest rate increases from Norges Bank.
But the professional fixed income market (see below) prices even higher interest rates going forward than Norges Bank has assumed.
If these interest rate professionals are right, the 3-month interest rate is as high as 1.17 per cent already in March, well above an assumed key interest rate of 0.75 per cent. This difference is unnaturally high.
Responds
This made chief economist Kjersti Haugland in DNB Markets react in the morning report.
If these professional players get it right, it could mean even higher mortgage rates for you than Norges Bank envisages.
But Kjersti Haugland dampens this fear of interest rates. The chief economist does not believe that the market will hit when they now price in the probability of a faster rise in interest rates in the near future. Most likely this will happen in the form of an extra jump in January.
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Good reasons
“We believe there are good reasons to expect that the plan to raise approximately every three months until the summer is maintained,” Haugland wrote in the morning report on Wednesday.
– There are expectations that interest rates will rise, it follows very clearly from Norges Bank’s plan, Haugland says to Nettavisen Økonomi.
In the Norwegian fixed income market, large, professional players can «Bet on» what they think about interest rate developments going forward. And this market envisages even higher interest rates than Norges Bank does.
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Reasonably safe
It is indisputable that Norges Bank raises the key interest rate at the interest rate meeting on 16 December to 0.50 per cent. When asked if it is as certain with an increase in March, Haugland answers:
– I’m not slanted. If the flare-up in the pandemic leads to measures that weigh on the economy, it will be natural to have a break in interest rate hikes.
– However, I am reasonably sure that the next increase will come in March, and that there will also be a new increase in June. But the further out we get in time, the more uncertain we should be, says the chief economist.
Norges Bank’s main line is a key interest rate of 1 per cent in the summer of 2022, and then they slow down. The interest rate development depends very much on the development in the labor market and the wage settlement, but it is important to remember that Norges Bank is not in a hurry with the current situation, says DNB’s chief economist.
The main picture is that the Norwegian economy continues to recover well, and then the point for Norges Bank is to return to a normal interest rate level.
1.5 percent
This indicates a key interest rate of 1.5 per cent, which before the pandemic set in, perhaps also 1.75 per cent when we get to 2024. But the pace of interest rate increases will gradually fall.
What speaks for faster interest rate increases is scarcity in the labor market, partly as a result of more difficult access to foreign labor.
– We can have a stronger rise in wages, which drives up inflation. But we believe most in a development that calls for two interest rate hikes in the next half year and a further hike in the second half of 2022, says Haugland.
Flowering
An increasing element of uncertainty is the corona boom, which in the worst case scenario could lead to new national shutdowns in our most important trading partners.
– How much should this uncertainty count in Norges Bank’s expectations?
– The pandemic is the biggest element of uncertainty, but Norges Bank will probably not change course unless they actually see a development that hampers the Norwegian economy, Haugland answers.
The chief economist says that her morning comment was aimed at what the fixed income market expects. And the interest rate professionals indicate a certain probability of an even faster rise in interest rates than expected.
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Gradually
– But Norges Bank has signaled a gradual rise in interest rates. There is uncertainty related to the pandemic and how interest rate increases affect the economy, households and the exchange rate, says Haugland.
– Why are interest rates rising abroad and at home?
– There is a lot of spotlight on higher inflation, and the rise in international interest rates has probably spread to Norwegian interest rates.
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