Norway – Norges Bank to Raise Interest Rates to ‘Normalize’ Economy

Article by Eunice Foo

With the end of an international economic downturn in sight, Norway is on the verge of a solid and imminent economic upswing due to its rate of vaccination and highly comprehensive policies.

Previously, the interest rate in Norway was set at zero to stimulate the economic slump caused by COVID-19. The central bank of Norway, Norges Bank, has decided to increase interest rates in September this year to balance financial imbalances from long periods of low interest rates and speed up the return to normal output and employment levels.

After cutting rates three times in 2020 due to the economic fallout from the crisis, Norges Bank unanimously decided to raise rates to 0.25% from zero.

“The normalisation of the economy indicates that it is now right to start a gradual normalisation of the key interest rate,” Øystein Olsen, governor of Norges Bank, said in a statement.

Western central banks are split over when to begin tightening policy even as economies rebound quickly, and some economists fret about rising inflation. For instance, its Nordic neighbour, Sweden Riksbank, confirmed that it was set to remain at zero for its policies at least until late 2024, while Iceland has already tightened its policy rate in May 2020.

Other major economies such as South Korea and the Czech Republic opted to raise interest rates to shift away from pandemic-era monetary settings as ballooning consumer debt created new economic threats and the rise of economic growth and inflation.

But still, with the residual of covid’s effects on Norway, what kind of effects would the rise of interest rates bring to the Norwegian economy?

Internal Commercial Awareness 

The knock-on of an increase in interest rate will affect the slowing down of rising house prices and lead to weaker purchasing power. This changes the landscape of Norway’s real estate as this raises mortgage repayments, and first-time buyers may be deterred from purchasing as they have never experienced rising interest rates before.

“All in all, purchasing power will weaken. This, in turn, will lead to a more moderate development in the housing market and a weaker price development,” Carl Geving, CEO of the Norwegian Real Estate Association, explained to public broadcaster NRK.

However, Norway’s total household consumption is expected to return to the pre-pandemic level towards the end of 2021/2022- previously, it fell to 7.6% from the annual average in 2020. The rise of household consumption will promote growth in Norway’s real disposable income, real houses prices, and real wealth by around 3% annual average over the last two years of the forecast period.

The hike in interest rates will also push the value of krona, which suffered a sharp depreciation in the first three weeks of March 2020. The raise makes the prospect of investing in Norway an attractive proposition and will help create wealth and jobs – further lowering the unemployment rate from its initial drop of 2.7% of its workforce and overall boosting the economy to full recovery.

Furthermore, investment developments last year were strongly impacted by the significant uncertainty on the financial outlook caused by the pandemic, both in Norway and among their trading partners.

Many businesses moderated their investment plans, and investments fell sharply during the first part of 2020. Service industries and manufacturing have been particularly hit hard by the pandemic. In line with the post-pandemic recovery and the rise in interest rate, investment growth is expected to be about 3 per cent in 2022 and somewhat less than this in 2023 and 2024. Bond prices may also fall when interest rates rise, possibly encouraging investors to invest more in Norwegian bonds.

External Commercial Awareness

European Landscape

Norway has recently reached a post-Brexit trade deal with the United Kingdom, its greatest trading partner on Norway’s access to the EU’s vast common market and tax exemptions as part of the European Economic Area (EEA).

“When Norway is speeding up on its way out of the pandemic, then good export agreements are important,” said Norwegian Prime Minister Erna Solberg.

The agreement contains the import of agricultural goods such as meat and cheese and fish exports to the UK. It is believed that British farmers could benefit from lower tariffs and more duty-free access to dairy goods, pork and poultry. The reduction of import tariffs on seafoods such as shrimps and haddock will lower costs for UK fish processing.

However, the rise of interest rate may influence the exchange rate between krona and pound and lead to a direct impact on input costs such as materials and labour, which lower the cost of export to the UK cheaper. 

Asia-Pacific Landscape

Norway is currently engaged in a negotiation with China for a new Free Trade Agreement (‘FTA’) as part of their plan to enlarge and expand its “circle of friends” across the world while “eliminating more tariffs on goods and increase market access for service trade and investment”. The spike in interest rates may cause an increase in the current real exchange rate and encourage higher returns for foreign investors, which will amplify Norway’s economic development.

Norway has also been accepted as a Sectoral Dialogue Partner from its partnership with the ASEAN trading bloc, announced at the recent ASEAN meeting in Kuala Lumpur. The ASEAN free trade area includes Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam.

The new partnership is believed by Norway’s Foreign Minister, Børge Brende, to be “extremely positive” for its potential and opportunities available for Norwegian companies in the fast-emerging Southeast Asian markets. 

Many of the nations in the ASEAN region are home to some of the world’s fast-growing middle-classes, leading to a growth spurt in consumer markets, making them attractive export destinations. 

Certain businesses are expected to benefit from the new agreement, such as a particularly large increase in a number of opportunities available in industries such as oil and gas and maritime. 

Utilising in Applications 

Firms that are Band 1 in Real Estate Finance such as Clifford Chance and Allen & Overy may be needed to provide their legal services on loan workouts, restructuring and possibly litigation, such as when commercial real property values increases over the next few years there may be increased litigation involving property tax assessment.

Legal services are also needed in assisting the negotiations and drafting Free Trade Agreements on the decision to increase interest rates that may affect the processes and import and export decisions.

Norwegian companies that have government contracts and trade internationally, especially in China and the UK, may require legal assistance to ensure that the transactions comply with numerous foreign trade policies. It’s especially crucial to retain government contracts and avoid costly relationships that may violate FTA stipulations.