Once again, the experts were caught off guard by the inflation figures, which came out on Tuesday morning. The figures show that the annual price increase ended at 6.5 per cent in March, while core inflation – which adjusts for energy prices – was 6.2 per cent. These are high figures, and miles away from Norges Bank’s target for price growth over time – namely 2 per cent. It is discouraging reading, both for the regular consumer and loan customer – and for Central Bank Governor Ida Wolden Bache. The sharp interest rate hikes are thus far unable to bring down the galloping price increase. 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 Struggling with job number one For Norges Bank, it is simply struggling to get job number one done, to ensure that we have low and stable price growth. “There should never be any doubt that we will do the job we are set to do – to ensure low and stable inflation,” Wolden Bache repeated in his annual speech in February. Norges Bank is struggling on several fronts right now. Firstly, Norwegians continue to pour money into the Norwegian economy, this can be seen both in shopping figures and housing figures – as well as figures for holiday bookings and cabin purchases. This contributes to price growth staying up. The many interest rate hikes therefore do not put enough pressure on households to throttle consumption. Increased food prices The comparison of food prices and the wage trend says something about whether you get more, less or the same amount for your money. When the development of food prices is higher than the development of wages, it means that food has become more expensive. Both figures are averages for the specified period. Read more about sources and reservations here. How much food prices have increased in the past year, compared to wage trends Everything from abroad is getting more expensive Second, the krone exchange rate is at a record low. The weak krone means that everything we buy in from abroad, and there is a lot of it, costs more. If you have a shoe shop and buy 100 pairs of shoes from Italy, they cost far more now than a year ago. The increased cost must be passed on to the shoe buyers, i.e. you and me, in order for the store to continue making money. The same applies to everything else we buy in Norwegian shops. The vast majority of consumer goods, apart from food, are imported. And from February to March this year, the prices of clothes and footwear, white goods and home textiles increased in particular – in addition, the prices of various types of consumer electronics have risen a lot in the past year. What these product groups have in common is that they are imported goods. Statistics Norway also points out that they saw increasing price growth for imported goods through 2022, and that this trend seems to have continued so far in 2023. Does not step in and manage In other words, the weak krone exchange rate has become a real pain for Norway’s krone Bank. So why don’t they step in and do something active with the krone exchange rate – for example, stop selling krone now that the exchange rate is so low? Norges Bank is the state’s bank, and buys and sells kroner to cover the state’s need for kroner and currency. How big or small that need is is determined by the Ministry of Finance. Being the state’s bank is done independently of the other tasks that Norges Bank has, such as setting the key interest rate. Nor can they take a break in krone sales to strengthen the exchange rate. There are often large amounts to be exchanged during the year, and in order to avoid large fluctuations in the exchange rate, Norges Bank tries to distribute the exchanges evenly throughout the year. Floating freely So what does Norges Bank do to strengthen the krone exchange rate? The short answer is nothing. The Norwegian krone floats freely, and has done so since 2001. In 2001, we were given an inflation target for monetary policy, which means that low and stable inflation is the main target when Norges Bank sets the key interest rate. Before 2001, we had for a long period different variants of exchange rate targets. In the 70s and 80s, both Norges Bank and other central banks intervened in the foreign exchange market. This was done because they wanted to strengthen the competitiveness of the export industry. This almost came to an end after most central banks, including Norges Bank, switched to an inflation target in the 1990s and 2000s. In Norway, we made an exception in the first phase of the pandemic because the market for Norwegian kroner did not work, so it was not to strengthen the krone exchange rate. Indirectly, an increased key interest rate alone will contribute to a stronger exchange rate, but as the key interest rates in the eurozone and the USA are higher than in Norway, among other things, it does not help much. Will continue to raise the interest rate Thus, it is most likely that Norges Bank will continue to raise the key interest rate, also in the future. In the previous forecast from the bank, which came before Easter, they suggested that the interest rate will rise twice more – to 3.5 per cent. That forecast rests on price inflation coming down. Today’s figures surprised on the upside, as they say in economic parlance. There will not be too many surprises on the upside before Norges Bank once again has to adjust its forecasts upwards. And as long as the krone is as weak as it is now, it is not an unlikely scenario.
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Norges Bank’s crown pain – Statement
