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What Norway's latest double interest rate hike means for your finances

Frazer Norwell
Frazer Norwell - [email protected] • 18 Aug, 2022 Updated Thu 18 Aug 2022 13:04 CEST
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This is how rising interest rates will affect your finances in Norway. Pictured is a stock photo of a house.Photo by Tierra Mallorca on Unsplash

The key interest rate in Norway has been raised by 0.5 percentage points to 1.75 percent by Norges Bank. But what impact will a second double rate hike mean for your money? 

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In line with analysts' predictions, Norway's central bank, Norges Bank, has opted to implement another double interest rate hike, following the one introduced in June. 

The bank announced that the key interest rate would rise from 1.25 percent to 1.75 percent. In June, the rate was also raised by 0.5 percentage points. 

"There is a need for a clearly higher interest rate to reduce the pressure on the Norwegian economy and bring inflation down towards the target," Ida Wolden Bache, Governor of Norges Bank, said in the bank's announcement. 

In September, leaders at the bank will convene for another meeting on interest rate hikes where it is likely that another rate hike will be decided. 

READ MORE: Norway’s central bank announces second double interest rate hike

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Why has a second double rate hike been announced? 

The interest rate hike has been announced to try and combat inflation. Inflation is rising higher than Norges Bank has previously forecast. 

Norway's consumer price index (CPI), which measures inflation, increased by 6.8 percent between last month and July 2021, the latest figures from Statistics Norway (SSB) show. There has not been higher growth in Norway since 1988. Significant increases in the price of food and fuel helped drive the inflation figures.

Even though interest rates will make loans and mortgages more expensive, high rates are seen as an inflation softening measure. 

"Although it may seem incomprehensible to many, a higher interest rate should act as a Paracet (paracetamol) for the financial headache many are currently feeling due to high prices," Consumer economist at DNB, Silje Sandmæl told public broadcaster NRK after the announcement. 

Higher mortgage and loan repayments also mean less disposable income, which usually drives prices down as a result. 

What does it mean for my finances?

The most obvious impact of the interest rates will be more expensive loan and mortgage repayments. 

A key interest rate of 1.75 percent means yearly repayments of 17,500 kroner per million kroner of debt. As an example, four million kroner of debt means yearly interest repayments of 70,000 kroner per year. 

However, banks typically lend at above the key interest rate, meaning those with floating mortgage and loan rates will pay above the key rate. 

Consumer economist Thea Olsen at Danske Bank Norge told Norwegian newswire NTB that she expects the rate for a mortgage to be around four percent by the end of the year. 

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A rate of four percent would mean yearly repayments of 40,000 kroner for every million owed. A mortgage for 4 million would equate to interest repayments of 16,000 kroner per year. 

Before the announcement, Managing Director at Real Estate Norway Henning Lauridsen told The Local that Real Estate Norway expects the interest rate hikes from Norway's Central Bank (Norges Bank) to stabilise house prices. 

"It will be better (to buy property) than now. We have had prices rise 8.8 percent so far this year. It has been pretty tough for home buyers, but we believe that the interest rate hikes will cool down the market during the Autumn," he told The Local previously. 

"We expect a situation similar to 2019, with prices going a bit down in the Autumn," Lauridsen concluded.

READ MORE: Will Autumn be the best time to buy property in Norway?

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 Carl O. Geving, CEO of the Norwegian Real Estate Association, has warned that the interest rate rises could see property values fall as a result.

"We are concerned about the effects of today's interest rate forecast. The consideration of vulnerable households and the risk of a fall in house values ​​indicates that the central bank should proceed very carefully when interest rates are to be normalised," he told NTB. 

Who's going to feel the biggest impact? 

Kjersti Haugland, chief economist at DNB Markets, told online business and financial news site E24 that the latest rate rises would hardest hit those on middle and high incomes as they typically lend more. 

"Perhaps mostly for those with medium or high incomes because they have high loans. This will be felt, there is no doubt about it," she told the site. 

Meanwhile, NRK's economics commentator Cecilie Langum Becker said that the rate hike would lead to monthly repayments of around 1,000 kroner more for a household with loans of around 3.5 million kroner

Additionally, some 300,000 Norwegians may need to sell their homes or other significant assets if interest rates in the country were to rise above four percent, a new survey from Danske Bank has revealed.

YouGov carried out the survey on behalf of the bank. Online newspaper Nettavisen, which has seen the figures, reports that one in ten would be unable to repay the interest or repayments on their loans if the rate rose above four percent.

Floating interest rates are pretty common in Norway, meaning those who benefitted from historically low rates are now feeling the squeeze.

“It is a very real scenario we are facing. The vast majority will not only have to deal with interest rate increases but also high price growth, such as the increased food prices,” consumer economist Thea Olsen at Danske Bank told the paper.

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Frazer Norwell 2022/08/18 13:04

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