On Thursday, Norges Bank announced another double interest rate hike. The key interest rate is now 1.75 per cent. We actually have to go back ten years to find an equally high level of the key interest rate. A year ago it was 0 percent. It is safe to say that interest rate increases have taken place at a rapid pace. One does not need to be an expert in monetary policy to conclude that what is happening now is completely extraordinary. Unusually strong language Central bank chief Ida Wolden Bache also uses unusually strong words to explain why it is urgent. “There is a need for a clearly higher interest rate to reduce the pressure on the Norwegian economy”, she writes in the press release on Thursday morning. She also uses expressions such as “significantly higher” and “clearly over” about the strong price increase. Norges Bank is not known for its violent use of adjectives, to put it mildly. The use of words thus emphasizes how deeply concerned Wolden Bache is about how quickly everything becomes more expensive, and what can happen if you do not get control of the price gallop. Seeing the start of the spiral We can already see that the tight labor market has led to wage growth so far this year being higher than was imagined in the early spring. For the companies, higher wage payments and increased expenses for electricity, among other things, mean lower earnings. Everything has become more expensive, and the price increase is very high. Norges Bank is therefore stepping up its rate hikes. Photo: NTB/news In order to compensate for that, the companies have to pass on some of it to higher prices – which in turn pushes price growth upwards. Norges Bank’s ultimate nightmare is that this spiral will ensure that high price inflation takes hold, and stays there. That is why it is urgent. The temperature in the economy must drop. Must get tighter finances We simply have to get such tight finances that we spend so little money that the temperature drops significantly below the boiling point. There are now three interest rate meetings left before Christmas, and several economists are open to the possibility that there could be another double interest rate jump in September – before two simple interest rate hikes in November and December. Vipps, in that case, we are up to a key interest rate level of 2.75 per cent before we write 2023 on the calendar. It will be felt, perhaps especially for the several hundred thousand new home owners who have entered the market in the extreme low-interest rate regime through and after the pandemic – but also for those who are already noticing that they have little left. High debt load Norwegians have a lot of debt, and in the last 30 years the amount of debt in relation to income has doubled. This means that interest rate hikes hit harder than they have done in the past. It has also contributed to Norwegian consumer confidence being at rock bottom, while expectations for the country’s own economy in the next year are very low. However, Wolden Bache emphasizes that those who have the least are also the ones who are hit the hardest when prices rise as much as they do now. Neither social security payments nor the wages of those with the lowest wages necessarily rise as quickly as wages in other parts of society. This increases the differences. Therefore, overcoming the high price increase through interest rate increases will also have a distributional effect, she said in a speech on Thursday afternoon. Will stay the course It will take a lot for Wolden Bache to change the course she has now set. She is of course fully aware of how cramped it is in many Norwegian households. We will get worse advice. We will make it tighter. That is the very point of the interest rate hikes.
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The whole point of the interest rate shock is to give us worse advice – Statement
