– I fully understand that this is challenging for some. But it’s still true that most Norwegian households have the finances to bear the increased spending, the central bank governor told NTB.
But it’s mostly the rapid and unexpected price hikes that hit those with the least, he insists. Thursday’s interest rate hike is happening precisely to try to keep runaway prices in check and curb inflation.
In line with what most experts anticipated in advance, interest rates were raised by a quarter of a percentage point. The official rate thus rises to 2.75 per cent, the highest level since 2009.
But that’s not all: Norges Bank announces a new increase to 3% in the first quarter. The interest rate will likely stay there before falling slightly in 2024.
That will mean a mortgage interest rate of between 4 and 4.5 percent, according to the central bank governor.
Uncertain times
But whether this will be enough to dampen price growth is highly uncertain.
– Now the price increase is very high and it is difficult to predict what it will be in the future. This is a challenging exercise, especially in the times we live in, says Wolden Bache.
He points out that times are much more uncertain than normal and that both the pandemic and Russia’s war of aggression in Ukraine have been two very disruptive elements for the economy. This has made it very difficult to accurately predict price increases.
In the report, Norges Bank writes that it believes future price growth will remain higher than previously estimated. It is electricity and food prices in particular that have risen, but the prices of a number of goods and services have also risen more than normal.
If prices continue to rise, the interest rate screw may need to be tightened even further, Wolden Bache points out. And the other way around: If inflation falls faster or unemployment is higher than expected, the interest rate may be lower than expected.
– It rarely goes exactly as we imagine it, admits the central bank governor.
Consume funds
Since Norges Bank presented its previous monetary policy report in September, both consumption and economic activity and price increases have been stronger than expected. At the same time, unemployment has not increased as much as previously thought.
A consistently high level of consumption can be explained by the fact that people have depleted their savings, Wolden Bache believes.
– But we expect a clear weakening of purchasing power next year, he says.
– If both the majority of people and companies shrink their wallets, what effect will it have on the economy?
– We are now seeing a turnaround in the economy. We expect consumption to decline in the future due to falling disposable income, and we also expect lower business investment.
– We also expect unemployment to rise, but from a very low level, says Wolden Bache.
At the same time, there is great uncertainty about how the price increase will affect next year’s wage settlement. Norges Bank estimates the deal will end at around 4.7%.
– Strong pressure
Consumer organization Huseirne believes that Norges Bank should have waited before raising interest rates and believes that most households should prepare for a difficult winter and spring.
– Household finances are under severe pressure due to rising electricity prices, rising municipal taxes and rising prices in general, says Carsten Henrik Pihl, consumer and communications manager at the organization of Huseirne consumers to NTB.
The interest rate hike has been in effect since February. Homeowners expect the first banks to announce their interest rate hikes as early as Friday or Monday.
