Norges Bank will follow the plan to keep the key interest rate at 0.5 per cent when the bank announces the interest rate decision on Thursday, according to economists. But several of them are now arguing that developments since the previous monetary policy meeting suggest an even higher interest rate path. This may mean that we get four interest rate increases during the year – not three, as the central bank signaled in the Monetary Policy Report in December.
– It looks like the most reasonable outcome, says chief economist Kjetil Olsen in Nordea Markets to NTB.
In December, it attracted a not insignificant amount of attention that the interest rate committee had not placed greater emphasis on the uncertainty surrounding the introduction of the micron and waited to raise the key interest rate until the situation was further clarified. Now the government has made relief in infection control, and there are many indications that the new variant will not have the crippling effect on society and the economy that many feared.
– There is great uncertainty about the further course of the pandemic and the effects on the economy. But if the economic development is about as we now envisage, the interest rate will most likely be raised further in March, said central bank governor Øystein Olsen in the justification for raising the key interest rate by 0.25 percentage points to 0.5 per cent.
Several factors indicate an upturn in the interest rate path, first and foremost inflation well above expectations.
* In December, inflation rose well above the estimate in the Monetary Policy Report, which indicates that we will reach the important inflation target of 2 per cent faster than Norges Bank assumes.
* Unemployment has increased somewhat, but not as much as feared when the omikron variant made its entry into Norway, Nordeas Markets points out in a recent interest rate analysis.
* Activity in the Norwegian economy is solid, and there are many indications that omikron will not have the cooling effect it feared. It seems that Norges Bank is right that this latest wave of infections will mostly behave like a “bump in the road”, DNB Markets wrote in its morning report on Friday.
– Then we are left with an economy with a capacity utilization above normal and prospects for stronger price impulses in the time to come. Everything thus seems to be in place for the interest rate hikes to continue, and for the next interest rate hike to come at the meeting in March, writes Magne Østnor in DNB Markets.
Believe in four interest rate increases
The forecast for the key policy rate in the Monetary Policy Report from December indicates a gradual normalization of the interest rate level going forward, so that the mortgage rate will be around 3.1 per cent in 2024.
– The development of inflation has been much stronger than Norges Bank assumed, and is the one data point that really stands out against expectations, says chief economist Olsen at Nordea Markets.
– So if we assume that everything else is in line with expectations, it indicates an upward adjustment of the interest rate forecast and increases the probability of a fourth interest rate increase – as we have argued for some time already, he says.
Relief in infection control and a milder setback than feared indicate an increased probability of four interest rate hikes this year. The first of these will, after all sun marks, come in March, something Norges Bank is expected to emphasize after the interest rate meeting on Wednesday, Marius Gonsholt Hov and Nils Kristian Knudsen believe.
Combined with a core inflation that has accelerated faster than expected by the central bank, more generous electricity support and in addition higher international policy rate expectations, it is in the cards that there is an upside risk to Norges Bank’s interest rate path, they write in their morning report on Friday.