On December 14, 2023, Norges Bank announced its final interest rate decision for the year, raising the policy rate to 4.5 percent. Despite the prior warning in November, the decision surprised many economists and industry players. Several observers note that the central bank's choice will pose challenges for Norwegian households in the coming period and further intensify the pressure on the already strained new housing market.
The Committee for Monetary Policy and Financial Stability at Norges Bank decided on December 13 to increase the policy rate from 4.25 to 4.5 percent. After six rate hikes this year, Norway's policy rate has reached its highest level since 2008, when it peaked at 5.75 percent.
As the committee currently assesses the outlook and risk scenario, the policy rate will likely be maintained at this level for quite some time, according to Norges Bank. The central bank's forecast for the policy rate, known as the interest rate path, suggests that the rate will remain at 4.5 percent until the autumn of next year before gradually declining. The forecast also indicates a small probability of a further rate increase in the first quarter of next year.
The rate hike is Norges Bank's measure to achieve the goal of monetary policy, which is to bring inflation down to around 2 percent. According to Statistics Norway, the consumer price index was 4.8 percent in November, well above the 2 percent target. The central bank points out that inflation is likely to persist in the coming period, even as the impact of foreign prices diminishes. This is due to a significant increase in corporate costs in recent years, expectations of sustained high wage growth, and further weakening of the Norwegian krone. Additionally, employment is high, and unemployment remains low.
- The interest rate is likely close to the level needed to bring inflation down to the target within a reasonable time. The committee is concerned with balancing the risk of tightening too much against the risk of tightening too little. The economy is cooling down now, and we have not yet seen the full effects of the rate hikes we have behind us. On the other hand, inflation is high, and the weakening of the krone makes it more challenging to bring down inflation. An increase in the interest rate now will reduce the risk of inflation staying high for a long time, writes Norges Bank in the press release.
Many economists expected the central bank to keep interest rates unchanged. Chief Economist Kari Due-Andresen at Akershus Eiendom expressed her surprise at the interest rate in VGTV's studio.
- I was surprised. This is an icy Christmas gift from Norges Bank, she said.
Senior Economist Oddmund Berg at DNB Markets called it "quite a contrast" to what the US Federal Reserve decided in its meeting on Wednesday to keep interest rates unchanged and plan three rate cuts next year.
- We are going completely opposite of what other central banks have done lately, Berg said.
Bjørn Roger Wilhelmsen, Chief Economist at Nordkinn Asset Management, deems the decision an error, asserting that the central bank did not have to take this course of action.
- It's a policy mistake. Inflation is on the way down, and internationally, all central banks are concerned about when to lower interest rates. Norges Bank is the last central bank to raise rates in this cycle, he said.
Wilhelmsen suggests that Norges Bank apparently has the greatest concern about the weakening of the krone and fears that this will lead to increased inflation and high wage growth.
- But the krone would have strengthened anyway because interest rates internationally are going down. This rate hike is, therefore, entirely unnecessary, the chief economist said.
He anticipates a brief tenure for the policy rate at 4.5 percent, with the initial reduction potentially occurring before summer, possibly as soon as March.
Chief Economist Sara Midtgaard at Handelsbanken Capital Markets shares the prediction that there will be several reductions next year. She points out that the rate hike indicates Norges Bank's concern about inflation.
- It indicates that the considerations are crystal clear. Low inflation trumps the growth outlook, even though the growth prospects are weak. Norges Bank shows that they are willing to raise interest rates even in a stagnant economy, she said.
SEB's Chief Strategist, Erica Dalstø, concurs that the apex of interest rates has been attained but projects that only a single interest rate cut will materialize next year. She points to indications from businesses in Norges Bank's Regional Network suggesting a substantial slowdown in activity in the early months of the coming year.
Sparebank 1 Gruppen's Chief Economist, Elisabeth Holvik, expresses a degree of understanding regarding Norges Bank's decision and highlights the ongoing substantial inflationary pressure in the Norwegian economy.
- Even with this interest rate hike, Norges Bank does not believe they will reach the inflation target until 2027. The krone is too weak and creates too much price pressure in the Norwegian economy, Holvik said.
She emphasizes a positive aspect for households, specifically that Norges Bank implies a likely brief period of elevated interest rates before a subsequent decline.
Chief Economist Frank Jullum at Danske Bank points out that the interest rate decision will harm the Norwegian economy.
- This also increases the risk that the Norwegian economy will be more severely affected. Looking at the estimates now, Norges Bank expects almost zero growth and increasing unemployment next year, Jullum said.
The homeowners' organization calls the interest rate increase "the Christmas present Norwegian households did not need." A policy rate of 4.5 percent will result in mortgage rates between 5.60 and 6.60 percent. In addition to high housing prices, increased loan costs will lead to tighter finances and reduced purchasing power for mortgage borrowers in the future.
"We know that expenses this fall have been heavy for many, and that's before the last interest rate hike in September has had a proper impact. Unfortunately, it is such that next year will be even heavier. All interest rate hikes will then take full effect. In addition, we see that electricity prices remain high, and municipal fees are increasing in most municipalities," writes Carsten Henrik Pihl of the homeowners' association.
Similarly, economist Midtgaard emphasizes that private economies will face increased challenges.
- It will be even tougher times for Norwegian households ahead.
CEO Carl O. Geving of the Norwegian Real Estate Agents Association suggests that the interest rate hike will be harmful to the housing market.
- The interest rate policy has already had far greater consequences for the new housing market and housing investments than the central bank has accounted for. Employment is falling rapidly in the housing industry, and the supply of homes will be greatly weakened as a consequence of the high interest rate level, Geving said.
The new housing market has long been characterized by low initiation and sales of new homes. According to the Home Builders' Association, the significant downturn in the new housing market continued through November.
Last month, the new housing market experienced a significant decline of 63 percent in the initiation of new homes. Lars Jacob Hiim, CEO of The Association of Norwegian Home Builders, expresses concern about the worsened situation and the ever-deepening crisis landscape, month after month. Apartment construction has stopped completely, and the sale of new homes has been declining for 29 consecutive months. The ongoing decline in housing construction suggests a potentially profound problem for housing supply.
Even with an average annual housing need of 29,384 units, only 10,921 units were initiated during the first 11 months of 2023. This indicates a significant failure in housing supply, making the time even tougher for those in need of housing. Hiim points out that the reduction in housing construction capacity will lead to undersupply and price pressure, and potentially affect jobs, families, and value creation for several years to come.
There have been significant reductions in all statistical measurements:
Sales of new homes in November 2023 are 19 percent lower compared to November 2022. Over the last three months, from September to November, 2,947 new homes were sold, a decrease of 29% compared to the same period in 2022. So far this year, the sale of new homes has been 11,532 units, which is 34% lower than the same period last year. The total number of sold new homes in the last twelve months is 13,372 units, a decrease of 37% compared to the previous twelve-month period.
The initiation of new homes in November 2023 has fallen by a staggering 63 percent compared to the same month last year. Over the last three months, construction of 3,360 new homes started, a decrease of 49% compared to the same period in 2022. So far this year, the initiation of new homes has been 10,921 units, which is 44% lower than the same period last year. The total number of initiated new homes in the last twelve months is 14,575 units, a decrease of 43% compared to the previous twelve-month period.
Sales and initiation of new holiday homes have also experienced a significant decline. So far this year, the sale of new holiday homes has decreased by 45% compared to the same period in 2022. The initiation of new holiday homes in 2023 is 39% lower than the same period last year.
CEO Lars Jacob Hiim of the Home Builders' Association points out that the central bank's latest interest rate hike will escalate the problem of low activity in the new housing market.
- The situation worsens with the interest rate hike, and the crisis becomes deeper and more serious. It is important that we quickly get a predictable and falling interest rate development to kickstart housing construction," Hiim said.
Sources: Boligprodusentenes Forening, DN, Eiendomswatch(1), Eiendomswatch(2), E24, Huseierne
