O / Unemployment to decline even further: Registered unemployment, % of labour force P / Higher wage growth due to tight labour market: Wage growth y/y and businesses reporting labour shortages, % O / Unemployment set to decline further. P / We expect strong wage growth due to the tight labour market. Also, the government’s compensation scheme will signif- icantly dampen the effect of the high electricity prices on inflation and households’ living costs. Households have saved more money than usual during the pandemic, and now the savings ratio is gradually ap- proaching more normal levels. Combined with more peo- ple in work, this points to good growth in overall con- sumption despite rising interest rates as some of the sav- ings buffer accumulated during the pandemic could be spent on consumption in the years ahead. A further in- crease in household consumption will be another key driver of economic growth going forward. Higher core inflation ahead We are fairly sure that inflation adjusted for energy prices and VAT will continue to rise due to higher prices of im- ported goods, higher wage growth and higher rents. Global prices of food, energy goods, transportation and other input goods have risen further after the war in Ukraine broke out. Markets still struggle with bottlenecks in manufacturing and transportation, and the introduc- tion of new severe coronavirus restrictions in China will prolong the global supply chain disruptions. But a some- what stronger NOK will dampen the effect of the rising prices in Norway. All in all, we still believe that core infla- tion will remain well above Norges Bank’s 2% target over the next couple of years. Headline inflation (including energy prices) ran at 5.4% in April. If not for the government’s compensation scheme for high electricity prices, inflation would have been as high as 7.2%. Unless energy prices spike up sharply, the year-over-year effect of the high energy prices will wane during the year. And the extension of the compensation scheme until March next year will also contribute to send- ing headline inflation much lower in the period ahead. Norges Bank’s policy rate at 2.5% by end -2023 In light of the strong economic growth and higher wage and price growth, Norges Bank no longer sees a need for the very low interest rate levels sanctioned during the pandemic. Consequently, Norges Bank has hiked its pol- icy rate three times so far to 0.75%. The latest rate path from Norges Bank shows the policy rate rising to 1.5% by end-2022 and to 2.5% by end-2023. Then the policy rate will be higher than what Norges Bank calls a normal level. The market has periodically priced in more rate hikes than suggested by the central bank’s rate path. We be- lieve it will take a lot for Norges Bank to raise interest rates more than four times per calendar year. The bank has expressed concern about the effects of a tightening pace faster than that. For it to happen, we think that Nor- ges Bank will have to see confidence in its inflation target being at risk of fading. This would require wage growth significantly above what has been agreed so far – some- thing that we do not foresee in our baseline scenario. Consequently we expect Norges Bank to stick to its plan from March, hiking its policy rate by 0.25 percentage point every quarter until end-2023. However, we would not be surprised if Norges Bank will have to signal further rate hikes beyond 2.5% in 2024. NIBOR rises in step with Norges Bank’s rate hikes Recently, NIBOR has declined due to better structural li- quidity in the Norwegian money market. As from 1 April, Norges Bank started to buy foreign currency (selling NOK) for an amount corresponding to NOK 2bn per day. The NOK selling was triggered by exceptionally large tax receipts from oil companies, which are now making far more money due to the high oil and gas prices. As a result, government oil revenues now by far exceed what is needed to cover the budget deficit. This, in turn, means that the surplus is transferred to the oil fund, albeit in for- eign currency. “ We believe that it will take a lot for Norges Bank to raise interest rates more than four times per calendar year.” Kjetil Olsen Nordea Chief Economist, Norway 2 / 2022 / Nordea Economic Outlook / 21
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