Wednesday, May 18

Expects six interest rate hikes and the highest wage growth since 2013

The Norwegian interest rate hikes come in the shadow of the US tightening. – If the Fed moves too fast, high-priced markets could experience a real downturn, DNB Markets fears.

NEW FORECASTS: The chief economists Kjersti Haugland and Kjetil Olsen in DNB Markets and Nordea Markets, respectively, present new forecasts for the economy.


Both Nordea Markets and DNB Markets are out with fresh forecasts for the economy.

– Omikron seems to be just a dump in the road and much is in place for continued solid growth going forward, writes chief economist Kjetil Olsen in Nordea Markets.

It opens up for six interest rate hikes over the next two years, both Nordea and DNB believe.

– On the basis of higher wage and price growth than Norges Bank now envisages, we believe the key policy rate will be raised faster and more, to 1.50 per cent during 2022 and further up to 2.0 per cent in 2023, writes Olsen, who forecasts interest rate hikes every quarter until well into next year.

Then the interest rate will be slightly higher than what Norges Bank describes as a normal level, and the highest since 2011.

Norges Bank cut interest rates to a record low of zero per cent early in the pandemic, and has not started raising again until the last six months. Last week, the bank kept the interest rate unchanged at 0.5 per cent, and at the same time announced a rise to 0.75 per cent in March.

The central bank’s latest forecasts point to three interest rate hikes this year and a further rise in interest rates to a peak of 1.75 per cent towards the end of 2024.

High inflation pushes up interest rates

In the wake of the pandemic, inflation has risen sharply both abroad and here at home. This year, total Norwegian inflation is expected to slow down as electricity prices fall and with government support.

At the same time, international inflation is raising underlying inflation. This is what Norges Bank looks at when setting interest rates.

– When the fight for inflation turns into a fight against inflation, we may end up with interest rates that will be a good deal higher than we have become accustomed to after the financial crisis, Olsen writes.

Both Nordea and DNB believe that the underlying inflation will exceed the target of two percent this year. The answer to that is increased interest rates.

– Even if wage and price growth picks up as we believe, Norges Bank still has time to implement the strategy with gradual increases, write DNB economists Kyrre Aamdal and Oddmund Berg.

They also point out that increased electricity prices contribute to weakening households’ purchasing power both last year and this year.

– Higher wage growth may cover something, but the rise in electricity prices is a factor that may have a dampening effect on private consumption this year.

Highest wage growth since 2013

The economists at Nordea Markets believe that there is reason to believe that we can live fairly normally again no later than Easter.

– In our main scenario, activity in the Norwegian economy and registered unemployment will be back to where it was before the omicron restrictions during the second quarter of 2022, Nordea’s report states.

This in turn will result in a tight labor market, with a struggle for workers.

– The workers’ organizations have seldom had a better starting point for negotiating higher wages, Nordea writes and points out that compensation will also be demanded for lost purchasing power last year.

– We are surprised if the limit in the wage settlement is lower than 3.5 percent. Wage growth can quickly approach 4 percent when we settle the status for 2022.

DNB is of the same opinion, with a forecast of 3.8 per cent.

– A tight labor market and higher inflation will facilitate the highest wage growth since 2013.

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Expensive electricity is almost paid for with extra wage growth

Open for house price falls in Oslo

Nordea estimates that house prices will remain broadly unchanged going forward. The reason for this is that interest rate increases indicate lower house prices, while higher wage growth pulls in the opposite direction.

– However, we are open to the fact that house prices may fall slightly in the places where they have risen the most and where the debt ratio is higher than the national average as in Oslo.

DNB expects house price growth to slow and moderate in the years to come. For 2022, the price estimate is 2.5 percent growth, down from 9.1 percent this year.

– It is fine to envisage periods of falling house prices, but on average in the next few years we assume a further price increase of about 2.5 per cent.

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The krone falls to the weakest level of the year: – Troubled stock markets dampen the krone outlook

The krone has weakened significantly in recent days, at the same time as stock market turmoil related to interest rate fears.

The krone exchange rate no safe haven

Despite upcoming interest rate hikes, neither DNB nor Nordea believe in any particular strengthening of the krone.

– The Norwegian krone is not seen as a safe haven in turbulent times, points out Nordea, which like DNB has an estimate of the krone against the euro of around ten kroner in a year, not far from today’s exchange rate.

In recent days, the krone has weakened considerably in line with market turmoil and interest rate fears on the world’s stock markets. Then investors are scared away from a small currency such as Norwegian kroner.

However, the oil price is a supporting factor, and has at times pushed up the krone exchange rate.

DNB believes the oil price will remain high, with an expectation of 83 dollars per barrel this year, 87 next year and 90 in 2024.

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Fed balances on slack line

Developments in the economy also depend to a large extent on what happens when the US Federal Reserve (Fed) starts raising interest rates, probably from March.

DNB Markets believes in four increases in the US this year, the same number next year, and then another two in 2024. The interest rate is currently in practice at zero in the US (0–0.25 per cent).

– In our main scenario, inflationary pressures in the US will decrease significantly through 2022, so that the Fed can raise interest rates relatively cautiously, writes DNB.

The brokerage adds that the uncertainty is great and that the Fed “balances on a slack line”. The bank is increasingly concerned that inflation will remain high, and signals that interest rates will rise.

– However, it can not go too fast. If it does, high-priced stock and credit markets could see a real downturn.

The Fed’s next interest rate meeting ends on Wednesday night with the publication of the decisions. The signals of a rise in interest rates will thus be very important for the markets.

The oil companies are doing well

– The effect of the coming rise in interest rates is difficult to estimate, and together with commodity prices constitute the most important risk for the stock markets.

DNB’s estimate is that the Oslo Stock Exchange in 2022 can provide a return of plus or minus five percent.

– We are not surprised if the raw material companies do somewhat better than expected in 2022. For example, it seems that analysts have assumed an average price for oil of 74 dollars a barrel, while the price at the time of writing is 89 dollars a barrel, it says in DNB’s report.

Meglerhuset emphasizes that the most important risk factors in the Norwegian stock market will be commodity prices, but points out that these can be both higher and lower than projected.

– The rise in interest rates is most likely to be greater than is assumed among investors today, but it is crucial whether the rise occurs as a result of higher economic growth or higher inflation.

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Escalation of the Ukraine conflict

DNB’s chief economist Kjersti Haugland also mentions the risk of escalating geopolitical tensions, as the danger that the conflict between Russia and Ukraine will develop into military warfare.

There are also tensions over China’s relations with Hong Kong and Taiwan, and in Europe the crisis in Turkey, with high inflation and a sharp weakening of the currency, could lead to a risk of uprisings and conflicts, as well as a more inflamed relationship with the EU.

Escalation of geopolitical tensions does not necessarily have a direct effect on the economy and inflation, but can have an indirect effect, for example through the energy markets.

– The market results will obviously depend on the severity, but will most likely go in a negative direction: Increased risk aversion and more volatility (turmoil, journ.anm.) Across markets, writes Haugland.

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