Goldman Sachs: Norwegian key interest rates soon available

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Last week, the Norwegian central bank again refrained from cutting interest rates, triggering cries of pain and tearing of clothes among people who had carelessly taken on debt to invest in Oslo real estate.

That was no surprise—every economist surveyed by Bloomberg had expected Norges Bank to stay at 4.5 percent—but it makes the Scandinavian country look more and more like an outsider both in the region and globally. Even Sweden's Riksbank is cutting rates now, for goodness sake.

FT Alphaville is very interested in the Norwegian macroeconomy, as it is, for some inexplicable reason, closely correlated with the mood at FTAV's global headquarters. Fortunately, according to Goldman Sachs, some easing may be in sight.

Investment bank economist Katya Vashkinskaya has studied what is driving inflation in the coldest Nordic country and believes Norges Bank is wrong, Despite it sounds so warlike:

— Since Norges Bank considers wage growth to be the main driver of inflation, we start assessing the wage outlook by estimating a set of wage Phillips curves for Norway. We find that slowing growth, increasing slack and declining inflation expectations point to a somewhat faster cooling of wage growth than Norges Bank forecasts (4.9% versus 5.2% in full-year 2024).

— Regarding inflation, we find that services inflation is best explained by wage growth, inflation expectations and domestic activity. Inflation of imported goods influences the exchange rate, global inflation and gas prices. We expect rental inflation to remain somewhat sluggish in the near term. However, due to moderating inflation in services (excluding rent) and imported goods, our core inflation forecast is 3.2% by year-end, below Norges Bank's forecast of 3.5%.

— In a final step, we try to replicate Norges Bank's policy rate model to estimate the impact on the interest rate outlook, taking into account prices and wages, inflation expectations, domestic demand and other factors. According to our forecast for wage growth and inflation, the model suggests two rate cuts this year. However, using Norges Bank's higher wage and core inflation forecast implies a more hawkish interest rate path with only one rate cut this year.

— Our analysis therefore supports our forecast for two 25 basis point rate cuts this year (November and December), assuming that inflation and wage growth develop in line with our forecasts. We expect Norges Bank to deliver quarterly 25 basis point rate cuts thereafter, up to a final rate of 3% in Q4 2025.

Conscious of its powerful Norwegian electorate, Goldman Sachs has kindly agreed to make the full report available to FT Alphaville readers. Enjoy.

However, there is one thing that worries us a little.

Goldman's forecasts depend on a strengthening Norwegian krone, which reduces imported inflation. And as MainFT recently wrote, the country is struggling to understand the “secret” of the krone's weakness. It should recover, but assuming this seems risky at this point.

FTAV strongly believes that predicting or even deciphering past currency movements is a futile endeavor – as the old joke goes: God invented currency strategists to make economists look accurate. But there is no shortage of theories.

One of the more plausible cases we've seen was recently published in Further Reading (tl;dr: capital outflows), but it's likely a combination of many culprits, which is why Jan Fredrik Tønnessen of DNB called it the “Murder on the NOKient Express.” [Ed: spoilers?] in a report last year.

Even though Norges Bank does not target the krona as a currency pair, it signaled quite clearly with the unexpected interest rate hike a year ago that it sees it as a crucial tool for curbing inflation.

This makes sense in a country that imports most things. The problem is that high interest rates can cause other problems in the country with the world's most indebted households (although 4.5 percent is obviously not terrible high and core inflation is still at 3.3 percent).

On a positive note, Norges Bank released its latest quarterly sentiment survey yesterday, which suggests expectations for both wage growth and inflation are falling. This may give the central bank a little more confidence in implementing its rate cuts. 🤞