Good times in the US may put Norges Bank’s rate cut on hold

The European and Norwegian economy has been at a standstill. In the USA, growth is strong. This spills over into Norges Bank.

Everyone with a loan is waiting for the first interest rate cut. Central bank governor Ida Wolden Bache said in March that the first cut will most likely come in September.

Afterwards, however, there have been a number of figures such as not bodes well for Norwegian loan customers.

The economists in some of the Norwegian banks have moved their estimates in line with this. Even if they do not fully agree, it is now difficult to find anyone who believes in interest rate cuts already in September.

Now it is December or next year that applies.

– We don’t think there will be any cuts until next year, says chief economist Kjetil Olsen at brokerage Nordea Markets. He presented his new one forecast Wednesday.

Strong growth in the USA

The USA is the world’s largest economy and the key interest rate of the central bank, the Federal Reserve (Fed), is the world’s most important.

The numbers speak for themselves: the economy in the USA is doing much better than in Europe:

• Since the last quarter of 2022, the economy in the United States has grown by 3 percent to the last quarter of last year. In the EU and Norway, growth has been close to zero.
• Correspondingly, the price increase from March last year to March this year was much higher in the USA than in the EU, calculated without energy and food.

The interest rates The interest ratesThe key interest rate is 4.5 per cent in Norway now. There is a new interest rate meeting on 3 May. in different countries follow each other. In the US, the expected interest rate cuts have been postponed.

Keeps the interest rate up

Upgraded expectations for US key interest rates in the near future lead to more of the world’s money flowing into dollars. The exchange rate of the dollar is rising.

Put another way: The krone is weakening. Since the beginning of March alone, it has weakened by 4-5 percent against the dollar. The weakening against the euro is somewhat smaller.

A weaker krone is bad news for loan customers. It works through what Norges Bank calls the “currency channel”: Imports become more expensive and contribute to pushing up expected Norwegian price growth.

The US differs from Europe

But why is it going so well in the US and so badly in Europe?

– Things are going badly in Europe because they were hit much harder than the US by the energy price shock in 2022. At the same time, wages change much more slowly than in the US. That is why real wages fell sharply in Europe, says Olsen.

Europe had to adapt to a new gas market and cut energy consumption sharply.

– Power-intensive industry was almost shut down.

The authorities in the USA also increased spending much more than in Europe.

– They simply gave money to people, says Olsen.

This has kept demand high. Olsen says that the current economic growth in the US is well above the long-term trend. The trend is determined by the growth in capital and labor force.

Unemployment in the US remains low and wage growth is high.

– Wages are an important cost and American companies can pass this on to prices, says Olsen.

High price growth in Norway

The Norwegian economy is a mixture of the worst of the EU and the US: Growth is as low as in the EU, while price inflation is higher than in the US.

E24 wrote in January about the Norwegian price increase as one of the most persistent. This is still the case. From March last year to March this year, only Iceland and Austria in Western Europe had higher rates price increase price increase Here the rain excludes energythan Norway.

The explanation lies in some special Norwegian conditions:

• The electricity subsidy kept electricity prices low this winter. The fall to this year’s more normal prices was modest and does little to reduce overall price growth.
• Agricultural settlements and the practices of grocery chains have meant that food price increases in Norway have come later than in other countries.
• Prolonged weak krone exchange rate means expensive imports.

Good views

Although growth is low, Olsen in Nordea believes that there are good prospects for the Norwegian economy:

– Growth will probably pick up during the year and unemployment will remain low, says Olsen.

The conclusion for loan customers is bleak.

– For reasons of growth and employment, it is not certain that Norway needs an interest rate cut, he says.

– Growth in value creation per hourly work is very low in relation to wage growth. This is what determines price growth in the long term. It can therefore be very demanding to get the price increase below 3.5 per cent.

He therefore believes that the low interest rate of the last 10–15 years may turn out to be a long-term exception.

– Before the financial crisis in 2008, a key interest rate of 4-5 per cent was seen as normal. I’m just reminding of it.