Nettavisen wrote in November last year that “this interest rate is absolutely crucial for your mortgage: Now it is skyrocketing”. We are talking about the important 3-month money market rate – Nibor.
In November 2021, this signal rate had risen to 0.80 per cent, now it is up to almost 2.20 per cent. In July alone, the increase is half a percentage point
In fact, this interest rate has not been this high since the summer of 2012. That is bad news for borrowers. So what has happened?
Another doubling?
– Some of the increase is probably due to increased expectations in the market that Norges Bank will raise interest rates more quickly. The market is now pricing in an increase of 0.50 percentage points at the meeting on 18 August, says senior macroeconomist Kyrre Aamdal at DNB Markets to Nettavisen.
DNB Markets expects an increase at each meeting until June, but then with the usual 0.25 percentage points. But Aamdal says that if Norges Bank steps in with double that in August, the central bank is much closer to the peak they signaled in June. Then Norges Bank believed in 3 percent interest in one year.
– We are holding a button on an increase of 0.25 percentage points now in August. There have not been such large surprising figures since the interest rate meeting in June. The underlying price increase is not that much higher than expected, and recently we have had a strengthening of the krone to NOK 10 against the euro (see the graph below, editor’s note), says Aamdal.
In isolation, a stronger krone reduces the need to raise interest rates by the same amount. Among other things, the price increase we get abroad will be lower.
The policy rate
- The key interest rate is Norges Bank’s most important instrument for stabilizing price growth and development in the Norwegian economy.
- The key interest rate in Norway is the interest that the banks receive on their deposits in Norges Bank up to a set amount – a quota.
- The policy rate is set eight times a year by the Committee for Monetary Policy and Financial Stability. Four times a year, Norges Bank issues a monetary policy report simultaneously with the publication of the key interest rate decision. The report includes a forecast for the future development of the key interest rate. This forecast is also called for the interest rate path.
- The key interest rate and expectations about future developments in the key interest rate primarily affect the interest rates between banks and the interest level the banks offer on deposits and loans to their customers. Market interest rates in turn affect the krone exchange rate, the prices of securities, house prices and the demand for loans, consumption and investments.
- Norges Bank’s policy rate can also affect expectations of future inflation and economic development. In other words, changes in the key interest rate affect many important parameters in the economy, hence the name key interest rate.
- Changes to the key interest rate take effect from the first working day after publication of the interest rate decision.
Source: Norges Bank
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The most important
As mentioned, the Nibor interest rate is important for your mortgage interest rate. This is an interest rate at which the banks themselves lend money. These loans are unsecured and have a short term, a few weeks or months. The 3-month interest rate is singled out as the most important and is used as the reference interest rate for many loans to customers, especially large corporate customers.
o the higher these market interest rates are, the more expensive it is for the banks to borrow money. Sooner or later the banks have to increase the interest rate paid to customers. However, the banks have a six-week notification period when they set the interest rates, so that the loan customers will receive the message at the beginning of October.
The interest rate meeting at Norges Bank in August is a so-called interim meeting. No new comprehensive analyzes are being carried out now, they will not come until September. But on 10 August the price development for July will come, and the June numbers were alarmingly high. Stronger price growth than expected could lead to another double interest rate hike.
More increases on the way
In June, Norges Bank increased its key interest rate by 0.5 percentage points to 1.25 percent. At the same time, the central bank signaled a number of future increases, the first of which will come in August. The key interest rate next year may end up at least 3 per cent, which means mortgage interest rates well into the 4s.
Today, a typical mortgage interest rate is 2.75-3 per cent, according to figures from Finansportalen.no. We are then talking about loans with floating interest rates, interest rates that vary in line with market interest rates, such as the important Nibor rate.
If you want to guarantee yourself a fixed interest rate for the next five years, you have to reach well over 4 per cent. In February 2021, you could have tied the interest rate to less than 2 percent.
Historic increase
And then we have several interest rate increases, the first coming on Wednesday. The US Federal Reserve shocked the market in June by raising interest rates by 0.75 percentage points, a so-called triple elevation. The last time that happened was in 1994.
There is another interest rate meeting tomorrow, and there could be another triple increase then. The interest rate increases in the US are not over.
– The market has priced in an increase of 0.75 percentage points tomorrow as well. It will be interesting to see if the central bank says anything new about where the top will be and if they then follow up with 0.5 percentage points in two more meetings in a row.
– In that case, they are up to 3.5 per cent, but the US interest rates come from unusually low levels. At the same time, the high inflation figures have been surprising, says Aamdal.
There is one big difference between the USA and Norway: American households are not as sensitive to interest rates as Norwegian ones, because the Americans mostly have long fixed-rate loans. Short-term interest rate increases therefore do not affect what the Americans have to deal with as much, unlike here at home.
Followed
The European Central Bank finally followed through last week with one increase of 0.50 percentage points, the first increase since 2011. But even after that the policy rate is not more than 0 percent, European interest rates have been negative since 20xx.
Common for both Norway, Europe and the USA is that the price increase is far higher than is desirable. The central banks are therefore trying to reduce the pressure on the economy by raising interest rates, they want, to put it somewhat simply, lower investment and more unemployed people.
– Prospects for more lasting high price growth indicate a faster rise in interest rates than previously estimated. A faster rise in interest rates now will reduce the risk that inflation will remain high and that there will be a need for a stronger tightening of monetary policy in the future, Central Bank Governor Ida Wolden Bache said in June.
Recession
But in Europe’s largest economy, Germany, things don’t look so good. Aamdal wrote in the morning report on Tuesday that Germany may be on its way into recession, downturns. The picture looks weak for the third quarter, and increased interest rates will, according to Aamdal, further weigh on development in the short term.
An island of price growth puts a clear dampener on household demand, and the prospect of gas rationing threatens. Aamdal believes that uncertainty about gas deliveries and possible rationing in the EU will weigh on development for a long time to come.
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