(Nettavisen:) The discussion a few weeks ago was about whether we reached an interest rate peak of 3 per cent or 3.25 per cent before the summer. Forget it. The market almost fully believes that Norges Bank’s policy rate will rise by 1 percentage point to 3.75 per cent in the autumn. Then we are talking about mortgage interest rates above 5 percent.
A mortgage of NOK 3 million can be a further NOK 30,000 more expensive before tax per year, NOK 2,500 per month. The actual increase depends on the type of loan you have.
– A lot has happened at once. We have generally received strong January figures from our trading partners, strong growth and inflation figures from the US, which spill over into the global interest rate outlook. In addition, there has been a Swedish price increase that was far above the Riksbank’s forecast.
– And also here at home, the figures for the labor market, the mainland economy and not least core inflation have been stronger than expected, says chief economist Marius Gonsholt Hov at Handelsbanken Capital Markets to Nettavisen about the upward adjustments.
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Betting contracts
Nettavisen has previously referred to the “betting market”, the so-called FR A interest rates. In the professional interest rate market, shorter contracts with different maturities linked to specific dates in March, June, September and December are entered into.
These contracts indicate what the market thinks the policy rate will be at, and these “bets” should not be dismissed.
– It is rare for Norges Bank to surprise the market very strongly, whether it concerns interest rate decisions or the interest rate path going forward. If Norges Bank had come out with a new report today, it probably would not have deviated much from the interest rate market, given that the market interprets the key figures and assessments correctly, says Hov.
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Definitely higher than expected
– Do you at Handelsbanken agree with these expectations?
– We will come up with updated forecasts next week, then we will see how much we have to adjust up. But the strong development in the economy and core inflation in January was clearly higher than expected by both Norges Bank and the market in general. There is no doubt about the direction, only how strongly the forecasts must be adjusted upwards.
– There was a price rise on a broad front and does not only apply to individual categories of goods and services. In addition, Norges Bank has recently been preoccupied with the weak krone exchange rate, answers Hov.
The krone exchange rate is now almost 4 per cent weaker than what Norges Bank had calculated, measured against an index of our most important trading partners. Imported goods account for 30 per cent of the underlying price increase, so that a weak krone exchange rate means a good deal for the total price increase.
– The exchange rates do not explain the entire import costs, they do not have full impact immediately. But a deviation of a few percent compared to what Norges Bank envisioned means that imported price growth will decrease less, says Hov.
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Identical with Norges Bank
The Technical Calculation Committee (TBU) came out on Monday with preliminary estimates for wage growth last year and assumed price growth this year. Hov does not think that these estimates will raise interest rates any more, among other things, the consumer price estimate of 4.8 per cent was completely identical to Norges Bank’s forecast.
The chief economist is more concerned with the tight Norwegian labor market, the high level of employment and price growth that is well above what Norges Bank has envisaged.
And on March 10, the consumer price figures for February will be published. They can be very important for what Norges Bank decides on a few days later.
The expectations from the central bank this time for core inflation are 5.9 per cent, sky high above the long-term target of 2 per cent. Norges Bank grossly underestimated January’s growth, which was a record high of 6.5 per cent.
Well above forecasts
– The February figure will be very important. We got a surprise in January well above Norges Bank’s forecasts. If the deviation for February persists or becomes larger, it will further fuel interest rate speculation.
– The climate we are in suggests that there must be a greater deviation on the downside for interest rate expectations to moderate, says Hov. In other words, the inflation figure must now be clearly lower than expected in order for the interest rate market to calm down.
Hov says that parts of the fluctuations we see in the market now are in any case linked to international interest rate expectations. There may be surprises here, for example labor market figures in the US and the US inflation figures for February. What we are talking about in terms of interest rates now is a snapshot.
– We have to be humble and not become speed blind, but the interest rate expectation has been turned up sharply, emphasizes the chief economist.
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Has a tightening effect
Should the key interest rate end at 3.75 per cent, it is a full 2 percentage points above what Norges Bank has said is a cyclically neutral interest rate: An interest rate that neither gives gas nor slows down the Norwegian economy.
– And Norges Bank has said that the interest rate is already starting to have a tightening effect on the economy, reminds Hov.
Handelsbanken’s chief economist does not believe that the central bank will return to double interest rate hikes, as we saw last year.
– No, it is the interest rate level that is most important. Norges Bank will hold a number of interest rate meetings this year and may continue with rate increases of 0.25 percentage points, rather than the double rate increases that we saw previously. Nevertheless, they can raise interest rates relatively quickly. They have meetings in March, May, June, August and September, says Hov.
– What do you think the wording will be in March, that the interest rate will most likely be raised further in the second quarter?
– There is no doubt about the direction. But if the outlook looks as steep as now, they could point specifically to the May meeting. And now the interest rate market expects a policy rate of 3.5 per cent in June. That means two more increases before the summer, one in May and one in June, Hov replies.
