In recent days, the krone has strengthened against the euro from almost 10.20 to 9.84 (see graph below). The krone has not been so strong since the beginning of November last year.
– This is essentially about oil and gas prices. It paints a picture of Norway again standing out in a positive sense.
– The Swedish krona weakens, and so does the euro. Expectations of interest rate increases in the eurozone are falling, says currency strategist Magne Østnor in DNB Markets to Nettavisen.
In isolation, lower interest rates and interest rate expectations are bad news for a currency. It will no longer be as attractive to invest money in the currency.
But the acute situation in the gas market is good for the Norwegian economy and the krone. We get a very high income growth that helps to strengthen the krone, because increased currency income must be converted into kroner.
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Speculators’ favorite
– As long as the demand for gas will persist, the krone is at the forefront of one of the obvious and expected winners. Some speculators use the krone to hedge in the foreign exchange market, and it is a speculative hedge, says Østnor.
The fall in the stock market internationally has increased, and it is normally not good for the crown. But Østnor says the krone value of foreign investment remains at about the same level. Then the managers do not need the investors to do anything with their portfolios, such as exchanging kroner.
The dollar, on the other hand, is a haven in uncertain times. The dollar has therefore strengthened against the euro, so that 1 euro now costs less than 1.10 dollars against 1.14 dollars a short time ago.
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Do not have reserves
Chief strategist Erica Dalstø in SEB says that it Russian central bank foreign exchange reserves in dollars are not available. Then the demand for dollars increases, and US interest rates rise.
– But we are in a special situation now. The krone normally does very weakly when the risk in the markets rises. But when energy prices rise as sharply as they do, commodity currencies are the ones that have developed the strongest.
– Should the war in Ukraine escalate further, we can get a significantly larger correction. The war will have greater negative consequences for Europe than for the United States, and the European Central Bank will proceed more cautiously with interest rate hikes, says Dalstø.
Key interest rate in the air
Simultaneously with the strengthening of the krone, the important 3-month money market interest rate has in recent days gone up. The signal interest rate is now up to 1.27 per cent (see graph below). This interest rate is very important for floating mortgage ratesloans that vary with market interest rates.
We must go back to March 2020 to find a similarly high level. The difference between the 3-month interest rate and the key interest rate at Norges Bank (0.50 per cent) is now clearly higher than it used to be.
This indicates that the market believes in interest rate increases in the future, og the first of 0.25 percentage points will most likely come on March 24. According to Østnor, the rise in interest rates in Iceland is primarily due to a rise in the corresponding US short-term interest rates, ie loans with short maturities.
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Imports from the dollar
– We have imported a higher risk premium from the dollar, the price of the dollar in the money market is increasing. This is partly due to the fact that the supply of Russian dollar deposits has deteriorated, and partly because some banks, perhaps especially the European ones, have lower earnings.
– Their operations in Russia are affected, and some banks have securities in Russian banks. There is an increased probability that they will have to take losses here and therefore pay slightly higher interest rates in the money market, says the strategist.
Østnor says that there will also be poorer liquidity in the Norwegian money market in the future. This is pushing up interest rates.
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Many increases in progress
DNB Markets forecasts four interest rate increases this year and two in the next six months, so that the key policy rate may have reached 2 per cent by the summer of 2023.
SEB also believes in four increases this year, but is content with an interest rate increase from Norges Bank next year. The key policy rate then stops at 1.75 per cent
– Yes, we have 1.75 per cent as the interest rate peak. 1.75-2 per cent is another normal level, and with the high electricity prices we have, the effect of interest rate increases will have an even stronger effect on households.
– As they have more debt, fewer interest rate increases are needed to dampen the pressure on the Norwegian economist and thus also inflation, says Dalstø,
Hefty wage settlement
But she admits that the Norwegian labor market is very tight. It is time for a hefty wage settlement this year, as there are virtually no available resources in the Norwegian economy.
– It puts pressure on inflation, but then we are over to the question of what is a normal interest rate: How much do we need to raise the interest rate to bring down inflation? asks the strategist.
Chief economist Øystein Dørum in NHO believes the key policy rate may rise to as much as 2.50 percent in 2024. It is highest among the major forecasters, and Dørum’s main reason is the tight labor market.
If Dørum is right, a typical mortgage interest rate will then be 4 per cent. Today, according to Statistics Norway, the average interest rate is just over 2 percent.
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