Earlier this week, Norway’s central bank, Norges Bank, raised the key policy rate from 0.75 percent to 1.25 percent.
“We understand that some are concerned when we announce such a rapid rise in interest rates. For some, it will be demanding, but most households have the finances to pay the loan with a slightly higher interest rate,” governor of the bank, Ida Wolden Bache, told public broadcaster NRK.
Norges Bank also announced that the key interest rate would be raised again in August to 1.5 percent. The bank said it was raising interest rates to curb high inflation.
“The committee’s assessment is that there is a need for a clearly higher interest rate to stabilize inflation around the target,” a press release announcing the rise stated.
Inflation in Norway rose to its highest level since 1988 last month, figures from Statistics Norway show. The Consumer Price Index for May showed that prices were 5.7 percent higher than they were a year ago.
By next summer, Norges Bank expects the key policy rate to be raised to around 3 percent.
The Forecast Centre, which offers financial analysis, told newswire NTB that the rapid rate rises would lose to an uncertain time for households.
“The most vulnerable households will enter a period of considerable uncertainty. There is no way around it,” chief economist Nerja Macic told NTB.
There are around 436,000 financially vulnerable households in Norway, according to figures from the national stats agency Statistics Norway. A vulnerable household has debts three times higher than its income and less than 100,000 kroner in the bank.
Norway’s Real Estate Association said that young homeowners and first-time buyers could also struggle due to the interest rate rises.
“Many have incurred a very high debt ratio in anticipation of low-interest rates for many years. With today’s interest rate forecast, many must prepare for significantly higher interest costs than they were predicted when they received their first mortgage,” Carl O. Giving, CEO of the Real Estate Association, told newswire NTB.
“At the same time, the threshold to the housing market will be very high for many first-time buyers who are allowed to borrow less when interest rates rise,” he added.
A key interest rate of 1.25 percent means yearly repayments of 12,500 kroner per million of debt. For example, for million kroner of debt at an interest rate of 1.25 percent means annual repayments of around 50,000 kroner per year.
This week’s rate rise meant repayments would rise by 5,000 kroner per year for every million one owes, in theory at least.
However, banks typically lend at above the key interest rate, meaning payments will be higher than the current 1.25 percent key policy rate.