Chief economist Jan Ludvig Andreassen in the Eika Group believes that Norges Bank is playing kroner roulette with the announced interest rate increases.
Andreassen stated yesterday to Nettavisen that he wants one interest rate break from Norges Bank. The central bank has announced up to seven interest rate increases over the next three years, and the chief economist fears it will give an overly strong krone. The krone is now at its strongest level against the euro since the summer of 2019 (see graph below).
In his blog, the chief economist goes even further. Here he uses the headline «Norges Bank at the roulette table», as if the interest rate policy pursued by the central bank is almost somewhat risky.
Andreassen symbolizes roulette with Dostoevsky’s short story “The Player”, in which the patriarch of a Russian noble family on holiday at a spa in Europe loses all his fortune. The chief economist believes that Norges Bank places too much emphasis on its own forecasts.
Think risk
– I have done a large Norges Bank analysis in a total of five blogs, which I am very pleased with. What I am constantly trying to say is that Norges Bank must think about the risk scenarios. Creating an interest rate path that is adapted to a forecast is not so important.
– It is more important to have an interest rate path that is adapted to the risk picture for the Norwegian economy. And one of the biggest risks to our foreign economy is the krone exchange rate. The surplus on the current account abroad can be 15 percent of the gross domestic product, Andreassen tells Nettavisen Økonomi.
– And how strong do you fear that the crown can then become?
– Now we have an oil-fired and an interest-fired krone. Norges Bank emphasizes that interest rates should be normalized, but I believe they must change their exchange rates both this year and next year. I think we can see 9 kroner against the euro already at the turn of the year.
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And euros: 8.50
– In the longer term, I see no reason for a weaker krone than the average we have had in the 2000s. Then we are on our way to 8.50. The green crown is weaker than the oil crown, and it is very important that we get a weak crown for the green shift.
Andreassen says that a krone of 8.50 will be very heavy for the industry and the green shift. The central bank has signaled a new interest rate increase already in December, which the chief economist believes must be canceled. But then there must be a lot of interest rate signals at the so-called interim meeting in November.
– If Norges Bank raises interest rates in December, I fear that we will get even more rocket speed on the krone. Norges Bank should now sum up a little so that we do not get more interest rate hikes, but even then the krone may be on its way back to 9 kroner against the euro.
Two effects
– And what does it mean for Norwegian business?
– It will have two effects: All competitive business, including cottage development, will mark a penny in the 8s. The second effect is on the consumer price index. We will get deflation (falling prices, editor’s note) in Norway in 2022 and 2023 if the krone remains at 9 kroner. This is because core inflation is so low in the first place.
We have not had deflation in Norway since the 1920s, which led to recessions. When prices fall and there are expectations of falling prices, businesses and households will be cautious about consumption and investment. It will intensify a downturn in the economy.
Central to Andreassen’s fears are interest rate differentials with Europe, which have not been an issue in the foreign exchange market for several years. A significantly higher interest rate in Norway can attract an unwanted amount of interest from foreigners and send the krone to heaven.
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Significant difference
– There was no connection between the interest rate differences and the krone exchange rate in the years 2016 to 2019. One can get the impression that there is never any connection, but it is.
– For government securities with a maturity of 3-4 years, the interest rate differential is almost 2 percentage points against Germany, and there is a significant interest rate differential. The difference is even higher against Switzerland and Denmark, Andreassen emphasizes.
He points out that the savings rate in all countries has increased. Amounts equivalent to 10,000 billion kroner are “restless on account in Europe” with negative interest rates, as Andreassen puts it in the blog. He believes that very quickly some of these funds can find their way to Norway. Few central banks are planning interest rate increases.
The chief economist believes that things have already gone wrong since the first interest rate hike on 23 September. The krone has strengthened by 3 per cent against the import-weighted krone index, so there is every reason for Norges Bank to take a break from raising interest rates.
Irresponsible
– It is irresponsible with further increases, and Norges Bank must be careful to use the word «normal». We are a small country in a sea of negative interest rates, we just have to accept that. I think it is obvious that all macroeconomists must understand that with further interest rate increases, we risk a krone far down in the 1980s, warns Eika Gruppen’s chief economist again.
Norway has a two-part economy. According to Andreassen, a strong krone will not be a problem for the energy industry, as they have margins to withstand a strong krone exchange rate. But most of the Norwegian business community is very exposed to competition, and a too strong krone weakens competitiveness.
– Then a very strong krone is unfortunate for business development in the long term and the green shift in the medium term. The “green” krone should be 11 against the euro.
– We live on a life lie and must become more aware. Norwegian macroeconomists are trying to forget what is called the dilemma in monetary policy, says Andreassen.
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Three conditions
– And what is the dilemma about?
– That there are three factors that Norges Bank must take into account: free movement of capital, interest rates and exchange rates. They can only decide to have control over two of them. The last variable becomes free and can not be controlled.
– With free capital movements between countries and a controlled interest rate, they must tolerate that the last variable, the krone exchange rate, can get out of control.
Andreassen says that there are various risks to the Norwegian economy, such as stock market crashes and wars abroad and the krone exchange rate. In terms of domestic affairs, we have a new government, but there is little indication that they will come up with anything revolutionary.
The wage settlement
– The political risk has been reduced. The biggest risk that many central bank governors fear is that the wage settlement will take off completely. The acid test next year will be the wage settlement, and it is a real dilemma, says Andreassen.
He believes we can live with a main settlement in the middle of the 3rd century, because total settlements then in 2021 and 2022 give zero improvement in purchasing power. This year, purchasing power will be reduced, as a result of high inflation driven by electricity prices.
– But there are delivery problems for many goods now, which can send prices up?
– It is temporary and will go over everything other than raw materials and energy. Here it has been underinvested, the investments are very thin in clean energy compared to the investments in hydrocarbons. We must have three times as high investments in renewable energy, says Andreassen.
The oil price is to blame
The other chief economists Nettavisen was in contact with pointed to the high oil and gas prices as the main reason for the stronger krone. Andreassen also believes we will get both high oil prices and high gas and coal prices in the future.
– There are many factors that affected the krone. But regardless of whether the underlying oil price is 60, 70, or 80 dollars a barrel, we get a very strong operating balance. Foreign trade is currently very strong, and with the recent appreciation of the krone it will be even stronger, Andreassen predicts.
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