According to market estimates, at the end of the year the reference interest rate will be around 3.25%. That’s too optimistic, two economists say.
Head of Global Allocation and Interest at Storebrand, Olav Chen. Photo: Adrian NielsenPublished:
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– “There is no way”. But perhaps one or two cuts towards the end of the year, is the comment of Olav Chen of Storebrand.
If there were five interest rate cuts, unemployment would rise surprisingly quickly, according to Chen. In December the unemployment rate was 1.9%.
Nor does Nordea’s Danish Chekov believe the market will meet rate cut expectations.
– More than two interest rate cuts are unlikely to occur this year, says Chekov.
– The market is not a conclusion. Over the past two years, according to Chekov, the market has repeatedly failed.
Just before Christmas, E24 spoke to economists from SEB and Swedbank, who were of the same opinion as Chen and Chekov. Norges Bank itself has signaled that there could be an interest rate cut this year.
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How is it possible that there is such a large gap between what the market expects and what economists at various banks predict?
The market is an average of what investors expect to happen. Market confidence in interest rate cuts in Norway is largely tied to expectations about what central banks abroad will do.
There are signs that both American and European central banks will cut interest rates several times this year.
According to economists, there are several reasons why the Norwegian central bank will probably not meet market expectations:
The increase in prices
Price inflation fell more in the Eurozone and the United States than in Norway. Underlying inflation Underlying inflation Inflation, excluding energy prices and tax changes, which is what Norges Bank mainly takes into account when setting interest rates, was 5.5% in December. We are far from the 2% target.
– Now we have had a sharp increase in interest rates, which has affected purchasing power and cooled the economy. Not many interest rate cuts are needed to get things moving again.
Nordea senior strategist, Dane Cekov. Photo: Adrian Nielsen
– If five cuts were achieved, the economy would inflame too much, says Chekov.
The crown
One of the reasons why price growth declines more slowly in Norway is the krona exchange rate. It has been near historically weak levels for much of 2023.
– One third of the price increase is due to imports. The weakness of the crown prolongs the pressure on prices in Norway, explains Cekov.
– It is not possible to reduce inflation in Norway if the krona is not under control. Furthermore, it often takes six to nine months for the krona’s exchange rate to materialize in prices, Chen explains.
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Many people wonder why the corona has weakened so much. But precisely the weakening of the exchange rate, according to Chekov, hinders many interest rate cuts. A higher interest rate should, in theory, make investing in krona more favorable.
A brand new macro image
Let’s move on to the reasons why economists believe the market is not meeting expectations.
That’s why interest rates won’t be lowered in the same way this time around, he believes – and highlights several factors:
After the fall of the Berlin Wall and China’s entry into the World Trade Organization, we have become accustomed to importing low-cost goods. That time is over.
Now country after country will become less dependent on China, and that will come at a cost. Ergo, according to Chekov, prices will remain higher for longer.
– Just look at wage growth, especially in the United States. There is a sudden strong demand for labor, which means American workers have regained the ability to negotiate wages, Chekov says.
– The next ten years will see greater price volatility, greater political uncertainty and a lack of resources, which will lead to a higher level of costs.
Foreign hedge funds
Chekov also reminds that there are players on the market who take advantage of market expectations regarding interest rate cuts.
– I think several foreign hedge funds have noticed that the interest rate in Norway is higher than in other countries and are simply betting against it. This creates great expectations of large interest rate cuts, that’s my impression, says Chekov.
Chief Economist Frank Jullum at Danske Bank. Photo: Danske Bank
The counter-current economist
One economist goes against the grain and thinks the market is right in its expectations of five interest rate cuts: Danske Bank’s Frank Jullum.
Jullum believes that price pressure will ease significantly over the course of the year and that interest rate cuts will follow. He says Norges Bank is constantly caught between inflation and recession.
– When we get to summer, we will see that the growth picture is still weak. From the summer of 2022, economic growth slowed down. It would be a little strange if we didn’t move towards a normal interest rate, Jullum says.
According to Jullum, the normal interest rate is around 2.5%. And the latest gross domestic product (GDP) data, which says something about the growth of the Norwegian economy, shows that the continental economy shrank by 0.2% in November.
– Another key argument is that since most Norwegians have a variable interest rate, the interest rate has a stronger effect. Therefore towards the end of the year the risk of recession in Norway could be greater than in other countries, says Jullum.
2024-01-18 05:16:17
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