Nordea Markets predicts that the first cut will have to wait until next year. The exchange rate of the krone means that they “can’t completely rule out” another interest rate hike either.
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– The big question is really why everyone expects interest rates to come down soon. It is far from obvious that the Norwegian economy needs it.
That’s what chief economist Kjetil Olsen writes in the recent report to Nordea Markets about the economic outlook, under the heading “no interest rate cut in 2024”.
“Persistence of high inflation, weak krone exchange rate, high wage growth and brighter prospects for the Norwegian economy will postpone Norges Bank’s planned interest rate cut until next year,” the brokerage house believes.
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At the same time, Nordea Markets expects only two interest rate cuts in 2025, and that the interest rate will therefore be 4 per cent at the end of the year.
Previously, the brokerage house believed in a cut in December this year, and that the interest rate would be lowered a total of three times in 2024 and 2025.
– Little that screams interest rate cuts
Norges Bank set the key interest rate at 4.5 per cent before Christmas.
Since then, the central bank has signaled that the interest rate will probably remain there “for quite some time to come”. At the previous meeting in March, central bank governor Ida Wolden Bache said that the most likely rate cut is in September.
Chief economist Kjetil Olsen’s sandwich list of factors that militate against lower interest rates at this early stage is long.
- Underlying price growth of 4.5 per cent is “still sky-high above Norges Bank’s inflation target” of two per cent. Although Olsen expects inflation to fall in the future, he believes it will be “tough” to continue downward after 3.5 per cent.
- The krone exchange rate is historically weak and has weakened markedly this year.
- Wage growth “is likely to end up above five percent for the second year in a row”. In this year’s salary settlement, the frame in the front subject was 5.2 per cent.
- Unemployment remains low.
- Economic growth “will probably pick up during the year”. The most important thing is that most people will have increased purchasing power due to high wage growth and lower price growth. And although “the construction sector is obviously struggling”, there are good times in the oil sector, the supplier industry and most of the export industry.
- House prices have risen by almost six per cent so far in 2024. Greater borrowing capacity due to wage growth, optimism in the market and little new construction make Nordea’s economists believe in further house price growth.
– There is little from such a review that screams interest rate cuts, writes the chief economist.
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– The danger of a further weakening of the krone is present
The krone exchange rate and the high price increase are two of the most important reasons why the interest rate has been raised. The weak krone exchange rate affects, among other things, price growth by making imported goods more expensive, while at the same time it can affect wage growth because a weak krone provides good profitability for many companies in export industries and industry.
At the same time, exchange rates depend on the level of interest rates in relation to other countries, and the expectations for the level of interest rates going forward.
– The danger of another sharp devaluation of the krone is still present. We therefore cannot completely rule out another interest rate hike, even if it is not our main forecast, the report says.
A dollar well above NOK 11 and a euro above NOK 12 can in any case start “speculation about a new interest rate hike”, according to the Nordea economists. Today, one dollar costs around NOK 10.9, and the euro just under NOK 11.7.
What happens in the US and at the European Central Bank will be important going forward. According to Olsen, the krone’s weakening this year is largely about the fact that faith in interest rate cuts in the US has fallen, after the decline in inflation has stopped and the economy is doing well. The market is now pricing in almost two interest rate cuts from the US central bank (Fed) in 2024.
– The krone is unlikely to strengthen before the Fed seriously starts cutting interest rates. The question is whether there will be any US interest rate cuts at all this year, writes Olsen.
The new normal
Although Nordea Markets believes that the interest rate will fall somewhat from the current level in the long term, Olsen is concerned that a normal or neutral interest rate level may soon be higher than we have become accustomed to in recent years.
The normal interest rate is the level that “neither gives gas nor slows down the economy” over time. Olsen points out that both Norges Bank and the Fed believe the neutral interest rate is now around 2.5 per cent.
– We have long asked questions about whether the decade or so we have just left behind was not the abnormal one.
He points 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.
