Nordea Markets sees rate tightening risk in Norway

Cuts to margins on mortgage products by lenders in Norway may yet cause the central bank to tighten its rates, sending NOK higher, says analyst Erik Johannes Bruce at Nordea Markets.

Commenting in a note published by Nordea Markets, Bruce said that competition in the local mortgage market had caused key lenders to lower the interest rates charged on mortgage products.

The implied effect on the economy is what could lead the country’s central bank – Norges Bank – to consider raising its own key lending rates sooner than expected.

“If we are to judge by what Norges Bank has said earlier lower mortgage rates than forecast means higher forecast for key rates all else equal, but not by the same amount. If Norges Bank were to raise key rates with 20bps money market rates will move upwards and NOK will strengthen,” Bruce noted.

However, that level of lower mortgage costs may not be enough to lead to near term increase in central bank rates, he added. It is more likely that any increase is likely to happen in the first quarter of 2015. That said, if mortgage rates were to fall further, by 40-50bps then “it could be enough to trigger a hike this year”.

This would not necessarily signal a cycle of tighter interest rates, but could be a more ad hoc reaction to cheaper mortgages amid a relatively strong housing market. But it does seem that cheaper mortgages and stronger house prices have created more risk of rising central bank interest rates, Bruce suggests.

NB view

Øystein Olsen, governor of Norges Bank, said in a speech delivered recently that there was an important link between monetary policy and developments in Norway’s prosperity over the past two centuries, but also the near term challenges.

He noted that “an abundance of natural resources has been essential for our country’s prosperity. Norway never did become a true manufacturing nation.”

And he added: “We cannot expect the strong growth in national income we have seen in recent years to continue. Norway is not immune to shifting circumstances and external shocks. But we have a good starting point. The beneficial tailwinds have been put to good use and Norway is in a solid position to tackle challenges when the winds shift.”


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