As chief economist at DNB Markets Kjersti Haugland writes, Norges Bank will definitely raise interest rates on Thursday next week. However, it is not certain by how much. Most likely, it will be an increase of 50 basis points, even though the central bank has been gradually raising rates since last autumn due to the indebtedness of Norwegian households. But the balances are getting trickier now. President of the central bank Norway Wolden Bache and others must recognize that the underlying inflationary pressure is stronger and more persistent than expected and expected.
It is definitely more difficult to reduce inflation than expected because it is much weaker Norwegian krone. In the long run, it could also make wage negotiations more difficult next year. High inflation increases wage requirements. The risk of a high increase in wage costs next year is therefore increasing at this point. By reducing the difference in interest rates between Norway and abroad, the central bank can contribute to strengthening the krone and thus also to price pressure.
Also read: The weak koruna exchange rate means another year of decline in real wages
With the example of last Friday, we saw that expectations of smaller interest rate differentials do indeed affect the crown. The koruna strengthened significantly as a result of inflation data, which caused the market not only to account for a higher interest rate high, but also a significant probability of a 50 basis point hike in June.
The Norwegian economy shows no signs of a sudden slowdown so far. If the received information on activity in the land economy for the month of April confirms our and consensus forecasts, this would mean a minimal increase of a modest 0,1%. This would indicate a slowdown in growth, which would be in line with the central bank's expectations, as in the March round of forecasts. On Thursday we will get the last piece of the puzzle before the interest rate decision.
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Source: DNB
