Policy interest rates in large parts of the world have probably reached their peak. After many and rapid interest rate hikes over the past two years, many central banks are now on target with the interest rate hikes, and see that interest rate policy is working on price growth. Norges Bank was one of the very last to raise interest rates, as recently as December. What everyone is wondering now is: when will the first interest rate cut come? Much points, however, to the fact that the interest rate cuts will be delayed for a little while longer. There are mainly three reasons for this: Things are going quite well in the USA The American economy is doing well. The labor market is strong, and price growth is the lowest in three years. In addition, the Americans have started spending money again, which is extra important in a country where the economy is very much driven by consumption. That people buy things is thus one of the most important drivers of the American economy. GDP growth is 3.3 per cent, and a setback in the economy looks very unlikely right now. Much of consumption is still driven by huge financial crisis packages during the pandemic, where everything from direct money transfers to citizens to tax cuts helped to stimulate consumption. Although the effects of the many thousands of billions spent are waning, the money is still flowing through the economy. US President Joe Biden is keen to demonstrate that he is pursuing a policy that contributes to increased investment in the US. Here he visits a brewery at the start of the election year. Photo: AFP It helps to keep price inflation above 3 per cent, which is still some way above the US central bank’s inflation target of 2 per cent. The price figures for January also showed a slight rise in price inflation. This led Fed representative Christopher Waller to end a speech last week by saying “why the urgency”, with a clear reference to speculation about an imminent interest rate cut. He now says that he needs at least a few months of figures to see that inflation is about to become so low that it justifies interest rate cuts. So even if several interest rate hikes are no longer relevant, there is great uncertainty about when and how quickly interest rates will be cut. The fact that growth in the American economy is so strong also makes it easier to be patient, as interest rate hikes are not as harmful to the economy as many had thought. The Americans feel that the price increases are not going as fast as before, but the price increase is still well above the target of 2 per cent. Photo: AFP It’s not that bad in Europe The story of the European economy is not so different from the American one, with the exception that growth in the eurozone is almost non-existent. It is nevertheless expected that better times will come in the eurozone in 2024, points out, among others, chief economist Kjersti Haugland at DNB Markets. The upswing is driven, among other things, by record wage increases, which have given Europeans increased purchasing power – at the same time that the labor market remains strong and price inflation has fallen sharply. Nevertheless, it is warned against cutting interest rates too early, because it could threaten Europe’s progress in the fight against inflation. European central bank chief Christine Lagarde has repeated several times that the first interest rate cut will probably not come until June. Precisely the high wage growth is an important reason for this. According to Lagarde, wage growth is now becoming an increasingly important driver of price growth. In this way, the high wage growth can help keep interest rates higher for longer. The head of the European Central Bank, Christina Lagarde, warns against hoping for earlier interest rate cuts in Europe. Photo: AFP Norway is quite robust The Norwegian economy is growing at a slow pace, but it is expected that growth will pick up gradually in the future. The labor market is still relatively strong, although unemployment has picked up somewhat. Figures from Statistics Norway show that unemployment is now at 3.9 per cent, after having been at 3.5 per cent through much of 2023. Figures from Nav, which count those who are actually registered as unemployed, show an unemployment rate of 2.6 percent. Nevertheless, central bank governor Ida Wolden Bache is very reserved when it comes to interest rate cuts. She spent a lot of time in her annual speech earlier this month stressing the importance of being patient. “This also contains a warning against letting up too early when price inflation falls,” she said, among other things. Among other things, she referred to a study of episodes of high inflation since the 1970s, in which researchers found that countries that were early in lowering interest rates when price inflation showed signs of abating experienced a resurgence in inflation more often than other countries. “Being patient has paid off,” she said. It is not without reason that both Wolden Bache and other central banks are now concerned. We have no experience of high price growth in recent decades, and have to go back to the 70s and 80s to find relevant examples – after we have had many decades of extremely low inflation. It may be relevant to recall that in the USA, for example, one had to go through a severe recession in the 80s, i.e. negative economic growth with very high unemployment, in order to break price inflation after having raised interest rates too early. Norges Bank waits In any case, it is natural that Norges Bank will wait for cuts from both the US and the eurozone before making cuts here at home. If Norges Bank cuts before the other central banks, it is likely that the krone will become even weaker. This will result in a new round of high imported price growth. As you know, when the krone is weak, everything we import from abroad – and it’s a lot – becomes more expensive. Right now, it seems that Norges Bank’s first interest rate cut will come sometime in the autumn, according to the bank’s own forecasts. Then it will slowly go down. Not until the very end of 2026, i.e. in almost three years (!), will the key interest rate reach 3 per cent. That means a mortgage interest rate of around 4.5 per cent, only one and a half percentage points lower than today. Yes, it will be easier – but many will still be under pressure. It is not certain that people have fully internalized that. Prime Minister Jonas Gahr Støre said in news’s Kveldsnytt on Sunday that the government sees a turning point that may come, and that they are working towards reducing the price increase and that the interest rate peak has been reached and can go down. It can be difficult for a Prime Minister to be patient while waiting for an interest rate reversal. It is for most of us. But the message to the central banks, both here at home and abroad, is unmistakable; there is no rush at all to cut interest rates.
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There is absolutely no urgency to cut interest rates – Statement
