Norges Bank Raises Key Interest Rate to Combat Inflation, Housing Sector Expresses Concern

Norway's central bank, Norges Bank, increased its key policy rate by 0.25 percentage points, reaching 4.25 percent on Thursday, in an effort to curb persistently high inflation. The bank stated the rise in interest rates was necessary to manage inflation, which has been consistently above the target of 2 percent. In August, the country's consumer price index (CPI) saw a 12-month increase of 4.8 percent, which was higher than expected.

In addition to this, the bank announced further hikes are likely in the future. "Whether it will be necessary to raise the interest rate further will depend on the economic development. We will probably raise the policy rate one more time, most likely in December," said Ida Wolden Bache, governor of Norges Bank.

The decision to increase interest rates was widely expected as part of the bank's strategy to combat inflation. However, the prospect of another interest rate hike in December came as a surprise to many analysts. The bank also indicated that it is unlikely to announce a rate cut in 2024 due to the persistent inflation issue.

This decision has significant implications for various sectors in Norway, including real estate and finance. The Norwegian Association of Estate Agents (Norges Eiendomsmeglerforbund) has expressed concerns about the potential impact of these interest rate hikes on housing supply. New housing project investments could potentially drop by 13-14 percent by the end of 2023 due to higher policy rates, exacerbating the existing shortage in housing supply.

The central bank's decision also affects commercial banks which usually increase their mortgage and deposit rates following a hike in the key policy rate by Norges Bank. This has led to more expensive mortgages since 2021 when Norges Bank began increasing its key rate. The bank now forecasts that mortgage interest rates could rise to 5.7 percent in 2024 and not start falling until 2025.

Despite the drop in housing prices in August, they have proven more resilient than most industry experts expected earlier this year. With pricier mortgages and expensive homes, many potential newcomers to Norway's housing market are reconsidering their purchase decisions.

While the supply issues are expected to become a problem in the future, the rate policy signaled by Norges Bank might help push down housing prices in the country even further, contributing to what some economists already expect to be a somewhat tough autumn for the Norwegian economy and housing market.

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