On Thursday, Governor Ida Wolden Bache took the most unusual step of raising interest rates twice. Although many economists had predicted that the interest rate would rise by 0.5 percentage points, most believed that Norges Bank would adopt a more moderate line of 0.25 percentage points. The sharp tightening sends a clear signal that Norges Bank is very concerned about the rapidly rising prices. The central bank governor’s strategy is to tighten quite hard now, to avoid having to tighten even harder a little further ahead. Good reasons for raising interest rates There are several reasons why Norges Bank does as they do: Activity in the Norwegian economy is high, with little spare capacity Unemployment is at a very low level Inflation is clearly higher than target, and has picked up quickly Even after Today’s interest rate hike, interest rates are still low from a historical perspective, and are constantly stimulating the economy. The key policy rate must actually be as high as 1.7 per cent before it starts to tighten, according to Norges Bank. Fast upwards Most indications are that interest rates will rise rapidly further ahead as well. Already over the summer, Wolden Bache says that the interest rate will most likely be raised further by 0.25 percentage points to 1.5 percent. Towards the summer of next year, it will be around 3 per cent, which means a mortgage interest rate of well over 4 per cent. If you have a mortgage of NOK 4 million, the current interest rate increase will give you around NOK 1,700 more in interest costs on your loan each month, before tax benefits. Looking a little further ahead, to the spring of next year, we have received seven new interest rate hikes. It can get the monthly calculation up to around NOK 7,500 extra, compared to the current interest cost. The calculation is made before tax benefit. Most people should be able to tolerate it When you take out a loan, you are stress tested on an interest rate increase of five percentage points. Thus, most people in theory should tolerate this. Nevertheless, life has become more expensive for most of us during the spring, with higher prices for food, electricity and petrol. This means that we have a little less to go on when interest rates are also raised. The wallet is getting slimmer, although most of us can also count on higher salaries. For families living on the margins, a mortgage rate that goes from 1.5 per cent to well over 4 per cent in just one and a half years will be demanding. According to DN, 423,000 Norwegians live in vulnerable households, defined as households with loans of more than three times income and less than NOK 100,000 in accounts. This type of household is most vulnerable. May seem incomprehensible To some, it may seem incomprehensible that Norges Bank should contribute to emptying the account even more. But with the strongest inflation in many decades, the central bank has no particular choice. The goal is to precisely extract the purchasing power of the market. Raising interest rates also reduces the population’s desire to buy things, be it cabins, houses or new bicycles. It must stagnate prices. And to achieve that, it has to hurt a little now, for it to get better in the long run.
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This is going to sting for most people – Expression
