What a December interest rate hike in Norway would mean for your finances
As winter approaches, people living in Norway may face more than just plummeting temperatures. A possible interest rate hike in December – affecting both the weak krone and the property market – looms over the horizon.
Prices in October in Norway saw a 4 percent increase from the previous year, outpacing the 3.3 percent growth in September, with core inflation – the long-run trend in the price level – reaching 6 percent.
This upsurge, particularly evident in the cost of food, furniture, household items, and cultural offerings, has surpassed expectations and may lead Norges Bank, Norway's central bank, to tighten its monetary policy to curb the rising inflation as it tries to bring the annual price growth down to 2 percent.
How a December rate hike might affect Norwegian consumers
The repercussions of a rate hike by Norges Bank could be multifaceted for the average person in Norway.
For starters, higher interest rates typically mean higher loan and mortgage costs, directly impacting household budgets.
People with variable-rate mortgages could see their monthly payments increase, which may cause a cooling effect on the property market as higher borrowing costs typically decrease demand for new mortgages and could slow down price growth in the housing sector.
READ MORE: High interest rates put the squeeze on Norway's housing market
However, this isn't a given because the wage growth in the country and the recent slump in new housing construction projects in Norway are expected to counteract the effects of the rate increase to an extent.
Regardless, consumers in Norway may need to tighten their belts as the cost of living could climb. If the interest hike materialises, credit card debts and personal loans will become more expensive to service, possibly leading to reduced spending.
This financial contraction in spending could have a knock-on effect on the broader Norwegian economy, as consumer spending is a significant driver of economic growth.
The effect on the Norwegian krone
On the currency front, the Norwegian krone might strengthen against other currencies as higher interest rates could attract foreign investors looking for better returns on their investments, potentially making Norwegian exports more expensive and affecting the balance of trade.
The krone strengthened in November after the inflation figures for October (up 0.7 percentage points from September and up 4 percent over the past 12 months) were announced.
The slight strenghtening comes after the krone almost slumped to an almost yearly low against other major currencies this week.
READ MORE: Why Norway's weak krone has dropped sharply against other currencies
A weak krone increases inflation as the price of goods imported into Norway become more expensive. However, higher interest rates are supposed to act as a remedy to both the weak krone and inflation.
Chief economist Harald Magnus Andreassen at Sparebank1 Markets and interest rate and currency strategist Nils Kristian Knudsen at Handelsbanken told the Norwegian Broadcasting Corporation (NRK) that the inflation figures point to an increased likelihood of Norges Bank raising interest rates in December, a move that was anticipated by the bank as early as September when Central Bank Governor Ida Wolden Bache said a potential interest rate peak of 4.5 percent was to be expected.
"This is another figure pointing to Norges Bank raising interest rates in December. There was a sharp increase in prices on a monthly basis from September to October, even if we disregard the rising electricity prices," Andreassen said.
Should it come to pass, it will mark the fourteenth interest rate increase since the monetary policy tightening began in late 2021.
At the moment, Norway's key interest rate stands at its highest level since 2008, when it reached 5.75 percent.
As the final decision on interest rates will be made by Norges Bank, the message to consumers is clear: prepare for a December that could bring financial chill as the bank seeks to stabilise the economy by reining in inflation, which could have lasting effects into the start of 2024 and beyond.
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Prices in October in Norway saw a 4 percent increase from the previous year, outpacing the 3.3 percent growth in September, with core inflation – the long-run trend in the price level – reaching 6 percent.
This upsurge, particularly evident in the cost of food, furniture, household items, and cultural offerings, has surpassed expectations and may lead Norges Bank, Norway's central bank, to tighten its monetary policy to curb the rising inflation as it tries to bring the annual price growth down to 2 percent.
How a December rate hike might affect Norwegian consumers
The repercussions of a rate hike by Norges Bank could be multifaceted for the average person in Norway.
For starters, higher interest rates typically mean higher loan and mortgage costs, directly impacting household budgets.
People with variable-rate mortgages could see their monthly payments increase, which may cause a cooling effect on the property market as higher borrowing costs typically decrease demand for new mortgages and could slow down price growth in the housing sector.
READ MORE: High interest rates put the squeeze on Norway's housing market
However, this isn't a given because the wage growth in the country and the recent slump in new housing construction projects in Norway are expected to counteract the effects of the rate increase to an extent.
Regardless, consumers in Norway may need to tighten their belts as the cost of living could climb. If the interest hike materialises, credit card debts and personal loans will become more expensive to service, possibly leading to reduced spending.
This financial contraction in spending could have a knock-on effect on the broader Norwegian economy, as consumer spending is a significant driver of economic growth.
The effect on the Norwegian krone
On the currency front, the Norwegian krone might strengthen against other currencies as higher interest rates could attract foreign investors looking for better returns on their investments, potentially making Norwegian exports more expensive and affecting the balance of trade.
The krone strengthened in November after the inflation figures for October (up 0.7 percentage points from September and up 4 percent over the past 12 months) were announced.
The slight strenghtening comes after the krone almost slumped to an almost yearly low against other major currencies this week.
READ MORE: Why Norway's weak krone has dropped sharply against other currencies
A weak krone increases inflation as the price of goods imported into Norway become more expensive. However, higher interest rates are supposed to act as a remedy to both the weak krone and inflation.
Chief economist Harald Magnus Andreassen at Sparebank1 Markets and interest rate and currency strategist Nils Kristian Knudsen at Handelsbanken told the Norwegian Broadcasting Corporation (NRK) that the inflation figures point to an increased likelihood of Norges Bank raising interest rates in December, a move that was anticipated by the bank as early as September when Central Bank Governor Ida Wolden Bache said a potential interest rate peak of 4.5 percent was to be expected.
"This is another figure pointing to Norges Bank raising interest rates in December. There was a sharp increase in prices on a monthly basis from September to October, even if we disregard the rising electricity prices," Andreassen said.
Should it come to pass, it will mark the fourteenth interest rate increase since the monetary policy tightening began in late 2021.
At the moment, Norway's key interest rate stands at its highest level since 2008, when it reached 5.75 percent.
As the final decision on interest rates will be made by Norges Bank, the message to consumers is clear: prepare for a December that could bring financial chill as the bank seeks to stabilise the economy by reining in inflation, which could have lasting effects into the start of 2024 and beyond.
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