How the Weak Krone Exchange Rate is Impacting Norway’s Economy

EMBASSY, OSLO (Nettavisen): At the Eiendom Norge conference on Tuesday, central bank governor Ida Wolden Bache spoke about monetary policy and the state of the economy.

– We do not manage according to a target for the krone exchange rate. But we are concerned about it, she said.

Weakest since Christmas

Last week, the krone exchange rate was at its weakest since before Christmas. It was then at its weakest level before the interest rate hike in December, measured against the currencies of Norway’s most important trading partners.

The krone strengthened significantly after the last interest rate hike on December 14, and remained strong for about two weeks. Since then, it has slowly but surely weakened again, measured against the I44 index, which is one of Norges Bank’s favorite indicators of the krone’s strength.

So far this year, the krone has weakened by 8.21 percent against the dollar, to NOK 11, while one euro is worth NOK 11.73, a decline of 4.5 percent since the New Year.

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This causes problems for Norges Bank, as a weak krone makes foreign goods more expensive.

– There is no doubt that we had higher price increases last year due to the krone exchange rate. That made the assessments difficult, Wolden Bache said.

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– The krone exchange rate was penalized

In a recent report published on Wednesday, senior strategist Dane Cekov at Nordea Markets says that the krone exchange rate got a better footing at the beginning of the year after Norges Bank went against the grain and interest rate hikes in December. Then the central bank went against the flow, because it happened at the same time as the central banks of other countries stood up and started talking about interest rate cuts.

– At the beginning of the year, interest rate market participants believed that the US central bank, the Federal Reserve (Fed), was going to cut the main interest rate six times this year from March.

– After three months of higher-than-expected inflation figures, there are only two interest rate cuts in the US this year.

The dollar has weakened 83 percent since April 2014, and eight percent just since the New Year.

– The krone exchange rate is penalized, and weakens especially against the US dollar, but also against the euro. This is despite the fact that oil prices and stock markets have risen so far this year, Cekov writes in the report.

To Nettavisen, Cekov describes the devaluation of the Norwegian kroner as “violence”, and Norwegian tourists to the US will have to count on dollars in the 11s for some time to come.

– In addition, there is a price increase in the US, which is 7 percent. It might be a good idea to take your vacation to another country, in Norway or, for example, a country in the Balkans, he says.

And if anyone had any doubts, Cekov has no doubts about the following:

– The Fed (US central bank) runs the show! We are not going to get a significantly stronger krone without the dollar weakening in general. Unfortunately, it’s hard to see in the short term.

Cekov believes that this shows that, in order for the krone exchange rate to strengthen, it is necessary to get help from the outside in the form of lower inflation and lower interest rates abroad.

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Energy price shocks can weaken the krone

At the same time, increased geopolitical tension, especially the situation in the Middle East, is a major risk factor.

– If the conflict in the Middle East were to spread, we could get a new shock on energy prices quickly.

He also writes that the central banks of the world could face higher energy prices and higher price growth with interest rates still high.

– The last two years show that the krone exchange rate does not necessarily come out stronger from a strong increase in energy prices.

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The dream setting

Cekov writes that the dream scenario for the krone exchange rate is that lower inflation leads to lower interest rates abroad, while international economic activity is picking up and energy prices are high.

– But such a situation may not have been so likely recently.

Nordea Markets still believes that price growth abroad will moderate, although it will take time. They also believe that the central banks will have the opportunity to gradually lower interest rates.

– That is the main reason why we still do not give up hope for a slightly stronger crown in the end.