How does the policy rate influence you?
The level of the policy rate influences, directly and indirectly, many of the everyday economic decisions you make.
Borrowing and saving
If you have more savings than debt, higher interest rates will increase your spending power. If you have more debt than money in your bank account, the opposite is true. You must then perhaps reduce consumption to cover higher borrowing costs.
When considering how much you can borrow, you must take into account that interest rates can rise. Whether you have more savings than debt or vice versa, higher interest rates mean that it is more attractive to save than spend.
As most of us have more debt than savings in the bank, higher interest rates will usually push down credit demand.
Wages and jobs
Reduced credit demand has consequences for firms that produce goods and services. It becomes less profitable for these firms to invest in increased capacity and then they might require fewer employees.
In such a situation, firms will be less likely to award large pay increases. Lower wage growth and lower demand will gradually curb the rise in prices for goods and services.
The policy rate level also affects exchange rates. If Norges Bank raises the policy rate, while other central banks choose to keep their policy rates on hold, it will be more profitable to foreign exchange market investors to own Norwegian kroner. This may lead to a stronger Norwegian krone.
With a stronger krone exchange rate, you will be able to buy cheaper imported goods and services. It will also be cheaper to go on holiday abroad.
At the same time, Norwegian goods will become more expensive abroad and export firms may experience lower profitability and reduced demand for their goods and services. This is how Norges Bank’s policy rate influences the private finances of each and everyone of us and the economy as a whole.
Changes in the policy rate influence activity levels across the whole economy and thereby inflation. The impact is transmitted through various channels and often with some lag.