Great nervousness around new interest rates

Interest rateNorges Bank. CEO Øystein Olsen. Photo Norges Bank

The big question before Thursday’s monetary policy meeting concerns ‘Norges Bank’ opening for an interest rate hike as a result of new monetary policy rules.


The analysts do not think Norges Bank will touch the record low interest rate of 0.5% now, but several economists believe the government’s new inflation target may open for an interest rate hike earlier than had been previously assumed.

The experts will therefore look for signs of this in the central bank’s monetary policy report on Thursday.

‘’The change of regulation is essentially primarily a reality orientation. But it is clear that a lower inflation target, from 2.5 to 2%, could mean a somewhat higher interest rate in the long run to keep inflation down,” said economist, Professor Ola H. Grytten, at the Norwegian University of Business Administration to NTB news.

“No significant change”

Inflation has been at approximately 2% since the inflation target was introduced in 2001.

There is little evidence that inflation in Norway will exceed the inflation target in the short term.Unemployment is still significant, and therefore the consequences of the lower goal become insignificant, concluded chief economist, Andreas Benedictow of ‘Socio-economic Analysis’.

“But it is easy to imagine a situation of high activity and rising inflation. Then the interest rate will necessarily increase earlier, and more-so with the new regulation’’, he noted to NTB news.

Norges Bank has previously signalled a possible interest rate hike towards the end of the year.

‘’I do not think the change in the regulation will be of any significance in the short term. Norges Bank has said that the change will not have a significant effect on the execution of monetary policy, and they can not make any significant changes now,’’ said economist, Professor Steinar Holden at the University of Oslo to NTB news.

Won’t touch it right now

In the big picture, probably the period of historically low interest rates will go in the end, and in the US,interest rates are raised already.

Even in Norway, the arrows point upwards, but analysts still agree that Norges Bank won’t yet touch the key rate.

Benedictow pointed out that growth has cleared up in the Norwegian economy, but inflation is still low and well below Norges Bank’s new inflation target.

“There are indications that housing prices are approaching the end of their low run, and an important argument against setting interest rates disappears. However, unemployment is still relatively high, and the uncertainty in the housing market is high’’, he stated.

“Overall, there are therefore good reasons why Norges Bank will see what developments there are for a while before it starts to set interest rates. It is unlikely that there will be any interest rate hike until the autumn, in line with what the bank has
previously suggested.

Seeing increased interest rates on the horizon

Other factors are involved than the new regulations, and they point to interest rates soon being on their way upwards.

“You may see signs of interest rate hikes in the course of the year, and perhaps a bit earlier than previously assumed, due to improved growth prospects in the Norwegian and international economies, as well as the possibility of somewhat higher inflation.

Holden pointed out that the economic upturn continues and that Norges Bank’s regional network reported a little stronger growth than it did in November.

‘’Global growth is also somewhat stronger, and interest rate expectations outside have been somewhat higher. All of this speaks of increasing interest rates somewhat earlier and higher than previously estimated’’, he said.

Over the next four years, interest rates are expected to rise by around 1.25%, according to Statistics Norway (SSB).


© NTB Scanpix / #Norway Today

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