Imagine that you have just returned home from a five-year journey in space, with no contact with people on Earth. You haven’t read the news. Tomorrow morning you start a new job, as central bank governor at Norges Bank. At the end of the evening, you will be handed a sheet of key information on how the Norwegian economy is doing right now. On the sheet it says: Wage growth: 5.2 per cent. Unemployment: 1.9 percent. Price increase: 3.0 per cent. Growth in the mainland economy: 0.2 per cent. No one would choose an interest rate cut. In short, this figure shows a good level of activity in the Norwegian economy, perhaps with the exception of growth in the mainland economy (forecasts also say that it will rise sharply next year). And then I haven’t even mentioned that the price of one euro is now NOK 11.5, while the price of one dollar is NOK 10.5. These are historically low levels for the krone. On Wednesday, you will lead your first interest rate meeting at Norges Bank. Based only on the key figures on the sheet, what is the right decision? Raise the interest rate, do nothing or lower the interest rate? The vast majority of economists would probably choose one of the first two options. No one would choose an interest rate cut. Strong opinion that interest rates should go down Stepping out of the space rocket just before starting the job as governor of the central bank would of course never happen in real life, but it is nevertheless an interesting thought experiment. Because even though the numbers are clear, there is still a fairly strong opinion “out there” among people that interest rates will soon fall. And that when it is first put down, there will be cuts on the assembly line. Many people who have lived with relatively high interest rates for one and a half to two years seem to cling to the hope that things will soon get “better”. It depends. Because even though the interest costs of everyone with a mortgage have skyrocketed in the last two years, there is little in the big picture that even whispers of an imminent interest rate cut. On the contrary, there are a few economists who are now opening the door slightly ajar for a very last rate hike this week. A kind of “grand finale” after two years of what many have experienced as the purest interest rate terror. An interest rate cut is not at the top of Norges Bank’s agenda. Photo: Snorre Tønset / news The list of counter-arguments is long For the list of counter-arguments against immediate interest rate cuts is getting long. Firstly, the krone exchange rate is still weak. It is still hovering around historically low levels. It affects us in several ways. One way is that our export companies are paid very well for everything they sell abroad, which gives these companies good profitability. It is also part of the reason why the salary settlement ended up so high this spring. At the same time, everything we import from abroad costs more. This has helped to push up price growth here at home. This effect has certainly calmed down, but Handelsbanken points out in a recent report that price growth for Norwegian-produced goods and services has now stuck at high levels – which is also linked to the very strong wage settlement. “No” foreigners want to work here In addition, the weak krone makes it more difficult to recruit foreign labour, because they are paid less here than in a long time. Unemployment is still around 2 percent, which is historically low. The labor market is under pressure, with many vacancies – especially within health and care. In order to get the krone on a better track, we have to wait until other countries cut the interest rate, before we can cut the interest rate here at home. As is well known, the money flows to the countries where the interest rate is the highest, and if we cut the interest rate now, the krone will probably become even less valuable. On the way to a war economy A new factor that stands out is that the world is heading towards a kind of war economy. Chief economist Elisabeth Holvik at Sparebank 1 has pointed to this on several occasions, and points out that the major trends of deglobalisation, rearmament and home flagging of production will affect the world economy for many years to come. This leads to increased investment in many countries, and increased public spending. Also here at home. The American central bank believes that we will be at a higher interest rate level than we are used to in the future. Photo: NICHOLAS KAMM / AFP The American central bank has increased its estimates of what it thinks interest rates will be in the longer term. The new normal will be a higher interest rate level than what we were used to in the decades when we could reap gains from increased globalization and disarmament, she believes. Norway is probably not an exception in this context. Withstands interest rate increases Time and again we see that the Norwegian economy has withstood the long series of interest rate increases well. Surprisingly good, we are to believe Central Bank Governor Ida Wolden Bache herself. The housing market, which is a good temperature gauge for the private finances of the thousands of homes, is strong. The banks report a large demand for financing certificates, and buying up homes before viewing. Good wage growth and a solid labor market where the vast majority of people are in work means that many Norwegians still have a good personal economy – even though there are also thousands of families who are now struggling. On Thursday, many believe that Norges Bank will push the first interest rate cut further in time, perhaps until next year. Some also believe that there is a certain danger of a surprise, final interest rate hike. It may be time to change the question from “when will the first interest rate cut” to “why on earth should we cut interest rates now?”. Published 18.06.2024, at 17.19
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Why on earth should she cut now? – Speech
