“But I don’t get it. It doesn’t work!” The woman standing behind me at the till at the store is the third person just that week to stop me and ask almost exactly the same question; Why does Norges Bank continue to raise the interest rate, when it “doesn’t work after all”? Norges Bank has raised the interest rate 11 times since they started with interest rate increases from the 0 level in autumn 2021. Three of the interest rate increases have been “double”, i.e. 0.5 percentage points. The others have been “ordinary” at 0.25 percentage points. It has gone at a furious pace. In the autumn, most of us have to count on a mortgage interest rate of 5.5 per cent. That means 55,000 in interest costs per year, per million you have in loans (before tax). It is felt, and it stings. The aim is to get price inflation under control, and steer it down towards the target of 2 per cent. Right now it is at 6.7 percent, i.e. miles over. Hence the perception that “it doesn’t work”. Policy rate in percent The policy rate is set eight times a year by Norges Bank. The policy interest rate governs the interest rates in the banks, and affects your housing costs. The aim of raising the interest rate is for the high prices to come down again. The forecast tells us how Norges Bank thinks interest rates will develop in the future. Read more about sources and reservations here. A higher policy rate means increased expenses if you have a mortgage 2021 2022 2023 2024 2025 2026 Forecast Norges bank What is happening? Being an economic commentator at news gives me a slightly different starting point for getting in touch with people, and understanding what they wonder about economics. And a trip to the store can give me completely new insights. Lately it has been absolutely extreme. People are frustrated, but also angry, about the increased interest rates. They poke me on the back and almost shout: What’s going on? And that has made me think that here Norges Bank has a job to do with how they communicate. People can tolerate a lot when they understand and acknowledge the reason why things happen. But when they don’t understand, it gets worse. Not understanding something can give a feeling of inadequacy. Sometimes not understanding something can create fear or uncertainty, especially if it is related to something important. Finances are about control Finances are important to people, especially when you know that the account is becoming more and more slim. Finances are often something people feel they should have control over. When, almost overnight, they have less money at their disposal than they need or are used to, this can create a feeling of powerlessness and frustration. Some people have to change their lifestyle. It is demanding in a society with an expectation of financial success. If someone fails to maintain this, they may feel guilty or ashamed. And if many people do not understand why it is necessary for Norges Bank to continue with interest rate hikes after interest rate hikes, then trust is lost. And it seems that the bank has underestimated it, even if it is not due to the attempts of central bank governor Ida Wolden Bache. Food is among the goods that have become more expensive. Photo: Pål Tegnander At the press conference last week, she made a real attempt to acknowledge people’s financial pain – right after she had delivered a double interest rate hike: “A higher interest rate, together with a number of other goods and services, will help many get a tighter economy. And some will have to reduce consumption, and that will be demanding”. And: “I understand that it will be demanding for many. The vast majority of households have the finances to handle increased interest expenses, even if this will mean that many will have to reduce consumption” Interest calculator The calculator uses the formula for annuity loans to calculate your monthly costs. Nominal interest is used here. This means that there will be an additional transaction fee which will vary from bank to bank. Today’s interest rate is taken from DNB’s mortgage interest rate for young people, and different banks will have different interest rates. The figures given here will therefore be approximate for you. Monthly expenses are interest and repayments combined. Read more about sources and reservations here. See how much you have to pay if the interest rate increases. Controversy for economists The explanation was, for most economists, completely straightforward and straight forward: “By raising the interest rate, we contribute to price inflation coming down. And it is also the best contribution monetary policy can make to ensure high employment and a stable economy”. And: “If we don’t raise the interest rate now, or raise the interest rate too little, we risk that price inflation will remain high. And if we get price inflation down, households’ purchasing power will improve. Yes, for economists, such as myself, this is straight-up fluff and standard economic theory. But for most people? Hardly. Neither the tone of voice nor the choice of words reaches ordinary people, with ordinary economic understanding. Wolden Bache fails to fully convey what is really at stake, and misses golden opportunities to really get the message out: What would we have risked if we had not served all these interest rate hikes? Yes, even bigger interest rate hikes later, perhaps ten to twelve percent. Here you only have to think of a number, it would have been horrible. And what would have happened to the crown if we had done nothing? A euro of 20 kroner, perhaps. Or a dollar at 19. Happy summer. The euro has also become far more expensive. Photo: Mailis Laos / Scanstock Photo Mandate and role understanding For Norges Bank, it is probably a lot about the mandate and role understanding. Their job is to keep inflation low and stable over time, and to inform the public about the measures. It did. We are in a time now where it is impossible to be a popular central bank governor, and we should be happy that Ida Wolden Bache cares more about price growth than about being popular. One can nevertheless argue that there may be room to interpret the mandate a little more broadly, where even more emphasis is placed on solidly anchoring the monetary policy with the people, through clearer and stronger communication. It is not certain that everything would have been resolved with more pathos, but it probably wouldn’t have hurt. In autumn, chief economist Kyrre M. Knudsen at Sparebank 1 SR-Bank called for “corona press conferences” about the interest rate. He told E24 that the bank failed to convey the seriousness of the “enormously special” situation the Norwegian economy is in. That argument still applies. Trust gives economic stability So one can ask the question, does it matter if people understand what Norges Bank does and why they do it? I mean yes, for a number of reasons: The central bank is one of the most important social institutions we have, and the one that perhaps has the biggest impact on our wallets. Confidence in the central bank is crucial for economic stability. When people understand what the central bank does, why they do it, and how it affects the economy, they are more likely to have confidence in the institution. If you understand why interest rates are rising, you can make more informed decisions about loans, savings, investments and home purchases. If you know that interest rates are going to rise a lot in the future, you may not buy a house that is too expensive, for example. Understanding central bank actions is part of a broader economic education, which can help people understand how the economy works and how economic policy affects them. Clarity and predictability in monetary policy, which comes from good communication and understanding, can contribute to a more stable economy. Unpredictability and misunderstandings can lead to financial instability. Perhaps fewer people would have maxed out their mortgage if they had realized how quickly interest rates would rise. Photo: Håkon Mosvold Larsen / NTB Need to bring out the seriousness So what is the solution? Part of it lies in clearer and more accessible communication from Norges Bank, where they show what is really at stake, which is twelve percent interest and a euro of NOK 20. As consumers, we can also challenge ourselves to learn more, ask questions and seek information. Knowledge brings power, and that is especially true when it comes to our economy. Economic commentators, like me, also have a responsibility here. We can help translate complex financial concepts and decisions into language that most people can understand. Increased understanding will not necessarily remove the frustration over higher interest rates and tighter budgets. But it can help us see the bigger picture, and understand why these decisions are made.
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Norges Bank must shout louder about what is at stake – Statement
