Below you can see how much more expensive a euro has become (rising graph) since the krone began to weaken last autumn. One euro in the foreign exchange market costs NOK 11.44 on Thursday at 1 p.m. With fees and poorer exchange rates, you have to fork out well up to NOK 12. The krone has not been this weak since the end of April 2020.
Over time, a weak krone means more expensive mobile phones, PCs, cars and everything else we depend on to buy from abroad. There are several reasons for the weak krone, the most important of which are:
- Interest rates abroad have risen more than here at home.
- The gas price has fallen sharply.
- Investors prefer major currencies in turbulent times.
- The krone weakens when the US stock markets fall.
– There are many factors that lead to a weaker krone. The krone is no longer a high-interest currency, quite the contrary, but it has been a long time since the krone was a low-interest currency, says the currency strategist.
In fact, interest rates should rise more abroad than here at home, if the market is right. Even classic low-interest currencies such as Japanese yen and Swiss francs have expected higher interest rates than Norwegian kroner in two years’ time.
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Interest-sensitive Norwegians
– It is connected with a slightly different interest rate policy. Norwegian households are far more sensitive to interest rates, says Østnor.
– Consequences of the weak krone are that it raises price growth here at home even further, but also higher prices for what we import. These prices are raised because they often contain imported parts, says currency strategist Magne Østnor at DNB Markets to Nettavisen.
Because of the krone, European holidays have become 10 per cent more expensive since last summer. A family holiday that cost NOK 50,000 last year now costs NOK 55,000. In addition, the rise in prices comes out, which makes the holiday plans more expensive.
– The weak krone is doing its bit to dampen the desire to travel. The positive thing is that it strengthens the competitiveness of export companies, says Østnor.
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Clearly lower expectations
Next Thursday there is a very important interest rate meeting at Norges Bank: How much will the key interest rate increase and what signals does the central bank pass on? The market is still convinced of an increase of 0.25 percentage points to 3 percent in a week’s time, but no longer believes in 3.75 percent as the interest rate peak this year. This is good news for borrowers.
– The market is now expecting one and a half interest rate increases until August, says Østnor. In other words, there will be an interest rate increase until Thursday, but then there is only a 50 percent probability of a similar increase in the next five months.
– The market is very much affected by what is currently happening in the banking sector. I think Norges Bank will raise the interest rate by 0.25 percentage points in a week. Then they will signal that the key figures point to an even higher interest rate, but wait for the situation and see if the banking sector has significant consequences for the economy.
Then there will be a freeze on interest rates
Østnor says that if what happens to the banks has an impact on production and employment in the future, interest rates will not be higher. So-called systemically important banks can fail.
Norges Bank formally makes its decision on Wednesday, the same day that the US central bank makes its announcement. But it comes too late to affect the outcome here at home. Normally, the “cut off” for Norges Bank for important key figures is the Friday before. This means that Norges Bank this time emphasizes key figures up to 17 March.
Another important factor in the devaluation of the krone is significantly lower gas prices, which result in far lower export and foreign exchange earnings for Norway. Much of this income is converted into kroner.
– Gas prices have fallen a lot since the beginning of the fourth quarter last year, as much as 85 per cent, but they came from extreme levels. We still have to go back several years to see current levels, says Østnor.
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More important than we think
He says the gas price has long been “undeservedly unimportant” for the Norwegian economy and thus foreign exchange earnings. But gas makes up half of the volumes of what we are able to export of oil and gas abroad.
– The export values are now higher for gas than for oil, but from day to day the oil price is still the most important for the krone exchange rate, says Østnor.
And there is no immediate clarity for the krone, then the turmoil in the markets must calm down.
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Not out of the woods
– For now, we are not out of the woods. The krone does not feel well with the market turmoil, and although it has not weakened in the past week, this turmoil is generally negative for the krone, says Østnor.
– Has the appetite for Norwegian kroner fallen in the market?
– Yes, it is the obvious fourth factor that weakens the krone. Recently, we have seen a fairly parallel development in a number of currencies that the krone is compared to, that is, other commodity currencies and Swedish kroner.
– The ratio is not one to one, but there has been a decline for risky currencies. It fits well with the picture that interest rates are up significantly as a result of higher inflation, and this also results in lower share prices.
Close connection with stock index
Both DNB Markets and Nordea Markets have been concerned that there is a close connection between how the krone develops and how things are going on the US stock exchanges. The key index S&P 500 is the benchmark here. If it falls a lot, it weakens the krone.
– The krone is one of the currencies in the world that is most closely related to the risk sentiment on the S&P 500. There are several reasons for this. Norway has a small open economy, and this is also because there is usually a positive correlation between the oil price and the stock market, says Østnor.
