The chief economist at Nordea Markets believes that the current interest rate may be the new normal.
Right now
The short version
- Chief economist at Nordea Markets, Kjetil Olsen, believes that the current level of interest rates may be the new normal.
- Norges Bank has assessed the neutral interest rate, i.e. the interest level that does not affect price and cost pressure, to be 2.5 per cent, while Nordea Markets considers it to be around 4 per cent.
- A higher or lower expectation of the policy rate going forward can affect the financial and currency markets.
- Olsen doubts that there will be rapid interest rate cuts, especially in view of important economic indicators that have come in stronger than expected, as well as a strong labor market.
- Nordea Markets does not expect any interest rate cuts in 2024, but anticipates two cuts in 2025 with a final interest rate of 4 percent at the end of the year.
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One of the questions economists ask themselves is how high the interest rate must be so that it does not increase or decrease price and cost pressure. This is called neutral interest.
– It is important for Norges Bank’s forecast, and shapes the view of where interest rates are headed, says Kjetil Olsen, chief economist at Nordea Markets, to E24.
Today, Norges Bank estimates that the neutral interest rate is 2.5 per cent. Nordea Markets believes it is around four percent.
– We think there will be a discussion, also in the central bank, to a greater and greater extent in the future, he says.
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The central bank’s estimate for the neutral interest rate level does not directly affect the policy rate. Nevertheless, it is important because it is part of the assumptions when the interest rate path is determined.
Higher or lower expectations for the key interest rate in the future may in turn affect the financial and currency markets.
Doubt about quick cuts
The big question that the market is trying to find an answer to is how well or badly the economy can withstand the many interest rate hikes.
– I think that is why the market is as volatile as it has been, he says.
In recent months, the market has changed its view on when the first rate cut will come, and how many. Now the pricing indicates that it is completely open whether there will be one or two cuts in the US in 2024, and the consensus is even lower for Norway
It happens after a number of important key figures have come in stronger than expected. On Friday, price growth once again ticked in above expectations in the US.
In addition, the labor market remains strong, many new jobs are still being created.
At home too, price inflation has held up better than economists and Norges Bank had expected.
Nordea’s chief economist wonders whether we really need an interest rate cut.
– The opinion of the vast majority is that the interest rate is much higher than normal, so now we have to lower it. Why does it have to go down? he asks rhetorically.
– There is nothing shouting and screaming for rapid interest rate cuts here, he follows up.
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Two cuts in 2025
On Wednesday, Nordea Markets presented forecasts. The headline Kjetil Olsen opened with was “no interest rate cut in 2024”.
At the same time, they expect only two interest rate cuts in 2025, and that the interest rate with that will be 4 per cent at the end of the year.
– We have long asked questions about whether the decade or so we have just left behind was not the abnormal one.
He pointed out that the financial crisis was a long and deep crisis that required low interest rates for a long time, and that the pandemic was not exactly normal times either.
– In the years before the financial crisis, interest rates of 4-5 per cent were not considered abnormal. In that case, we may not have to expect too many interest rate cuts in the coming years. We’re leaning that way.
