Lower inflation, but also a risk of negative events that could weaken financial stability

The rise in interest rates in recent years has helped cool the Norwegian economy and dampen inflation. Unemployment has edged up from a low level. Many central banks have communicated increased confidence that inflation will be close to their targets ahead, and several have started to reduce policy rates. Norges Bank’s forecast in Monetary Policy Report 3/2024 indicates that the policy rate in Norway will be gradually reduced from 2025 Q1.

At the same time, there is a risk of negative events that could weaken financial stability, and political tensions are higher than they have been in a long time. New shocks abroad may impact the Norwegian financial system. Financial system vulnerabilities could amplify a downturn in the Norwegian economy and lead to bank losses.

Firms and households have ample access to credit

In Norges Bank’s lending survey for 2024 Q3, banks reported slightly higher demand and unchanged credit standards. This means that banks’ credit assessments are not stricter than before, but higher interest rates have limited how much households and firms can borrow. Credit premiums in the corporate bond market have fallen in 2024 but have risen slightly in recent weeks. In Norges Bank’s overall assessment, households and firms have ample access to credit.

Household debt growth has been slower than income growth in recent years 

For a long period, debt and house prices rose faster than household income and contributed to increasing household vulnerability. High and rapidly rising debt can amplify economic downturns and increase the risk of financial crises. In recent years, debt growth has been slower than income growth. Over time, such developments may reduce the vulnerability of the household sector to interest rate increases or a loss of income. On the other hand, household vulnerability could increase again if looser financial conditions result in rapidly rising house prices and debt.

Debt growth rose slightly over summer but remains at a low level. House prices have risen through the year. Existing home sales have been high, as has the number of homes listed for sale in recent months. New home sales have also picked up a little but are still low.

Somewhat improved commercial real estate prospects, but still challenging for real estate developers

Higher interest rates have weakened commercial real estate (CRE) firms’ profitability and led to a fall in commercial property prices, but prices now appear to have levelled off. High employment and rental income growth enable most CRE firms to cover higher interest expenses with current earnings. Weaker profitability and solvency may pose problems for firms that need to refinance debt. So far in 2024, credit premiums on CRE firms’ bank and bond financing have fallen, which is likely to reduce refinancing risk for debt maturing in the coming years. Further developments, however, remain uncertain. If employment were to fall markedly and rental income prove to be markedly weaker than expected, many firms could face debt-servicing problems.

The share of bankruptcies among Norwegian firms has risen since the beginning of 2023. The rise has been particularly pronounced among real estate developers, whose profitability has been impaired owing to higher interest rates, high construction costs, low residential construction activity and sluggish new home sales. This makes it difficult for many developers to service debt out of current earnings. Bankruptcy rates in most other sectors have also increased somewhat but are still lower than before the pandemic.

Capital requirements reflect the vulnerabilities in the Norwegian financial system

The countercyclical buffer rate of 2.5 percent helps maintain bank resilience. Norwegian banks satisfy capital and liquidity requirements by a solid margin and are highly profitable. Banks’ corporate credit losses have increased somewhat in the first half of 2024, but overall credit losses are still low. The solvency stress test in Financial Stability Report 2024 H1 shows that banks can absorb large credit losses, while still maintaining lending.

The Committee unanimously decided to keep the countercyclical capital buffer rate at 2.5%.

Ida Wolden Bache
Pål Longva
Øystein Børsum
Ingvild Almås
Steinar Holden

25 November 2024

About the countercyclical capital buffer

The countercyclical capital buffer is intended to strengthen banks’ solvency and mitigate the risk that banks amplify an economic downturn. The countercyclical capital buffer is intended, in principle, to range between 0 percent and 2.5 percent. Norges Bank will normally set the buffer rate in the upper part of this range. If a downturn will or could cause a marked reduction in credit supply, the countercyclical capital buffer rate should be lowered. In the event of particularly high cyclical vulnerabilities, the rate may be set above 2.5 percent. If cyclical vulnerabilities recede significantly over time and the outlook for financial stability is good, the buffer rate may be reduced. Norges Bank sets the countercyclical capital buffer rate each quarter.