Norway’s central bank raised interest rates again on Thursday in its latest attempt to control inflation. That has prompted some criticism that rising interest rates could hurt jobs, but other new numbers point to persistent labor shortages.
Norges Bank’s committee charged with safeguarding financial stability in Norway announced that it had voted unanimously to raise interest rates by another half a point to 2.25 percent. It was exactly what many economists and analysts had predicted, and follows even bigger rate hikes in other countries, including the US.
This means that Norwegian commercial bank lending rates will rise accordingly, although mortgage rates will remain unusually low at around 4 percent compared to rates tolerated by previous generations. Even savers should finally get higher interest rates on their deposits.
More “gradual” increases are on the horizon
The central bank committee also stressed that the key interest rate “is most likely to be raised further in November”. Several economists and analysts expect interest rates to end the year at 2.75 percent, with the bank itself suggesting rates will settle at “around 3 percent” this winter.
Norway’s state statistics agency SSB (Statistics Norway) has meanwhile put the country’s current inflation rate at 6.5 percent after prices for food, housing, energy, transport and other consumer goods rose sharply. That’s “well above our target of 2 percent,” said Norges Bank Governor Ida Wolden Bache, “and there are prospects that inflation will remain high for longer than previously forecast. We are raising interest rates with the aim of reducing inflation.”
It could hint at how the central bank’s decision to raise it from zero to 2.25 percent last year is “starting to have a tightening effect on the Norwegian economy.” This, in turn, “could point to a more phased approach to policy rate setting,” the bank’s committee said in Thursday’s announcement, adding that “forecasts in this report” are based on the 3 percent estimate “over the winter.” “ are based.
Rising interest rates worry economists at SSB. They claim that the central bank’s target of just 2 percent price growth threatens its goal of high employment levels. newspaper Dagens Næringsliv (DN) also published this week a warning from Roger Bjørnstad, chief economist at Norway’s largest trade union confederation, LO, that “jobs for all are still the number one goal”. Steinar Holden, an economics professor at the University of Oslo, has also urged Norges Bank to cancel some of its planned rate hikes to keep the unemployment rate low.
However, it fell on Thursday, with SSB reporting it down 3.1 percent. According to survey methods from the state welfare agency NAV, unemployment fell to just 1.7 percent in July, the lowest level since 2008. Demand for labor remains high in Norway as customers have flowed back to the workforce after the pandemic has abated However not.
News agency NTB reported earlier this week that nearly 30 percent of Norwegian businesses and public authorities are struggling to find employees with the skills needed to fill available jobs. Labor shortages are particularly severe in construction, other skilled trades and healthcare, but restaurants and retailers also need more help. There was an acute shortage of workers in the tourism industry last summer, for example in newspapers post Reporting of alleged “cannibalism” as employers tried to outbid each other to hire workers. Nor were there enough Norwegians to replace all the foreign workers in the service industry who left the country during the pandemic. Many have not returned.
Norges Bank reported that “the future trajectory of the policy rate will depend on how the economy develops”, but conceded that the forecasts were “more uncertain” than normal. Russia’s war in Ukraine, for example, has disrupted supply lines and resulted in shockingly high energy prices, and things may get worse before they get better.
“If there is any prospect of inflation staying higher than we are now forecasting, a higher interest rate may be needed,” the bank said on Thursday. “A sharper fall in inflation and activity than currently forecast could reduce the need for rate hikes.”
Governor Bache and the central bank committee seem to be listening to the critics, also acknowledging how many Norwegians “will face financial constraints given the rapid rise in prices as interest rates rise”.
However, they claimed that “faster interest rate hikes now reduce the risk of inflation becoming entrenched” which in turn could require “greater monetary tightening (and higher interest rates) later on”.