Track milestone: First interest rate cut in sight

2022 was a year characterized by inflation, energy crisis, price growth and rapid interest rate increases.

– Last year was a bit of a shock, says chief economist Kyrre M. Knudsen at Sparebank 1 SR-Bank.

In twelve months, the interest rate was raised six times, to 2.75 per cent.

– It is rare that we see an interest rate rise at that pace. Electricity prices dropped completely. The war in Ukraine also created a more uncertain situation. We saw that people became very skeptical about their own finances, he says.

Fortunately, the chief economist takes a slightly brighter view of the year ahead of us.

– In the short term, we face some of the same challenges as last year. Price inflation is still high, and interest rates are on the rise. Then people will notice that the rise in interest rates is not as big as last year, and that there will be some bright spots, he says.

– Will get more control

Knudsen perceives that the situation in the Norwegian economy right now is very divided.

On the one hand, many people are in work and unemployment is low. On the other hand, high inflation, price growth and increased interest rates have begun to have consequences for the finances of private individuals and companies.

– The growth rate for Norway is starting to slow down. When you look a little further into the future, I believe that the high interest rate will have an effect into the autumn and beyond next year, and that we will get more control over inflation, says Knudsen.

DN mentioned the matter first.

Norges Bank kept the policy rate unchanged at 2.75 per cent in January. Both Sweden and Denmark have raised the key interest rate above this, and Knudsen believes Norway will soon follow suit.

Expect more interest rate jumps

Inflation rose to 7 per cent in January, which was well above Norges Bank’s forecast of 5.9 per cent.

– This indicates that there will be another interest rate jump in March, as Norges Bank has signalled, says Knudsen.

He envisions the interest rate being raised to 3 percent in March.

Knudsen then predicts a further increase in interest rates in June, to 3.25 per cent, and at the same time comes with some good news.

– Unlike several others, we do not believe that interest rates will be raised further in September. We think the interest rate will stop at 3.25 percent. Flattening the interest rate will make it easier to plan and more transparent for people, says Knudsen.

The chief economist emphasizes that there is an unusually large degree of uncertainty related to how inflation and the key interest rate will develop.

– It is challenging for the central banks to get inflation under control, because there is so much uncertainty in every single figure. The interest rate can be both higher or lower than I assume.

Believe in more rate hikes

In contrast to Sparebank 1 SR-Bank, DNB believes that the interest rate will be raised three times by June.

– We believe the short-term macro figures suggest that you should continue to raise for a while, because the economy seems robust and inflation shows no signs of abating, says senior economist Oddmund Berg at DNB Markets.

He shows a report prepared by SSBwhich estimates that the rise in interest rates has reduced households’ disposable income by around three per cent in 2022.

In comparison, the drop in interest rates in 2020 and 2021 during the pandemic contributed to around one percent higher disposable income.

DNB believes the interest rate peak will be reached at 3.5 per cent.

– We believe the economic picture will worsen over the next six months, giving Norges Bank good reasons to stop at 3.5 per cent to await further economic development, says Berg.

Tracks interest rate cuts

After the interest rate peak in June, Knudsen believes that the next milestone will come in September 2024.

– In a year and a half, I think the interest rate will be lowered, he says.

Senior economist Oddmund Berg at DNB will not make a similar prediction.

– I am not sure how useful such a prediction is all the time we have no good basis to base such a prediction on at the moment, he says.

Berg points out that the timing of when the interest rate cut will come depends on what happens to growth and inflation going forward.

– We have just adjusted the interest rate peak once again, because the Norwegian economy seems more robust than expected and inflation has remained high. The fact that the Norwegian economy currently shows few signs of weakness may mean that interest rates will have to be high for quite some time. Norges Bank feels confident that inflation is under control, he says.

DNB also believes that the situation is highly uncertain.

– On the other hand, we may well experience an abrupt halt in growth during the next six months. This may change the outlook for further price growth and mean that the interest rate can be lowered again much earlier.

– Good starting point

Although September 2023 is a long way off, Kyrre M. Knudsen believes that most people have a good starting point to cope with the interest rate leveling off at 3.25 per cent.

– To a large extent, the situation leads to people saving less, or using up saved funds. The starting point is still good, since many saved money during the pandemic. I also find that people take action and reduce costs and are more aware of how they spend their money, he says.

At the same time, Knudsen points out that a small proportion of the population faces significant challenges as a result of increased inflation, price growth and living costs.

– Normally, that group makes up approximately seven percent of Norway’s population, while now it is estimated to be up to fifteen percent. It still means that the vast majority have a good starting point for dealing with the economic challenges, he says.