Rapid fall in interest rates risks rebound

2023 was a year of major fluctuations in the fixed income market, what is the outlook for 2024? Interest rates were affected by market turmoil at the start of the year, but stronger than expected macro data in the middle of the year contributed to the perception that we are heading for a very soft landing for the economies, which led to a relatively sharp rise in longer-term interest rates in particular.

Particularly strong rise in interest rates in Norway

The rise in interest rates was particularly strong in Norway in the first half of the year, as inflation showed few signs of coming down and the krone exchange rate weakened sharply.

Since mid-October, we have seen a significant decline in interest rates based on increased expectations of interest rate cuts in 2024. In 2023, the rate hikes did not come as much of a surprise to the market as in 2022. Both the Federal Reserve and the ECB have raised interest rates somewhat more than expected at the start of the year, but the difference between expectations and outcomes is not dramatically large.

The main exception is Norway, where a slow decline in inflation and a weakening krone have led to significantly larger interest rate hikes than expected at the start of the year.

Biggest surprise in Europe and the US

For the US and Europe, the biggest surprise in 2023 has been that the real economy has held up better than expected, and for much of the year the market has priced in increasingly lower expectations for interest rate cuts in 2024 and 2025.

This resulted in a significant increase in interest rates with longer maturities from May to November, with a preliminary peak for US 10-year interest rates of over 5 per cent around mid-October. At the same time, we have seen a positive development with falling inflation in both Europe and the US, and gradually also in Norway, although developments here at home are still lagging behind.

The fall in interest rates in the latter part of 2023 seems to be based on an increased degree of certainty that the central banks are now at the peak of their key interest rates and that we will see interest rate cuts through 2024.