If you’ve been on a trip to London, Copenhagen or New York in the last six months, you’ve surely noticed: as a Norwegian, you get very little for your money abroad at the moment. If you swipe your card for a cup of coffee when you land at Kastrup airport in Copenhagen, the coffee costs DKK 46. A quick look in the online bank afterwards shows that the account has been debited for NOK 68. What on earth is going on? Continental Danish krone Let’s take the Danish krone first. The Danish krone is tied to the euro. This means that the Danish central bank constantly ensures that the euro/Danish krone exchange rate is always the same, what is called a fixed exchange rate policy. In Norway, we have a floating exchange rate, and the central bank does not normally enter the market to support the currency, for example. So when we are on holiday in Denmark, the price of Danish kroner is determined by the price of the euro. And then it is a bit interesting to talk about the euro; Why is it so strong? One euro now costs around NOK 11, and is therefore around a historically high level. With the exception of a peak of almost NOK 13 just when the corona pandemic hit, it has largely remained below NOK 10. Many may even remember back to when the euro was introduced well over 20 years ago, when people often counted on NOK 8 for one euro on holiday in France. A relative game When talking about currency, there are never two lines under the answer, because there are so many things that affect the exchange rate at the same time. It is difficult to distinguish the various effects individually, because they are closely related. I’m pretty sure I once learned at the Business School that divination in coffee grounds was as useful as trying to predict future exchange rates. Exchange rates are a relative game. Is it the krone that is weak right now, or is it the euro that is strong? The short answer is yes; both. I am nevertheless making an attempt to break down the various effects that are believed to play an important role for the Norwegian krone right now. Policy rate in percent The policy rate is set eight times a year by Norges Bank. The policy interest rate governs the interest rates in the banks, and affects your housing costs. The aim of raising the interest rate is for the high prices to come down again. The forecast tells us how Norges Bank thinks interest rates will develop in the future. Read more about sources and reservations here. Higher key interest rates mean increased expenses if you have a mortgage Interest rate differentials in the wind The European Central Bank, the ECB, has distinguished itself with many rapid and large interest rate hikes. They are likely to continue raising interest rates at the next meetings, perhaps with double rate hikes. European Central Bank Governor Christine Lagarde. Photo: Nyhetsspiller Then for quite some time they will have a policy rate that is either equal to or higher than the Norwegian one, and then the investors will rather put their money in the eurozone than in Norway. When fewer people want to buy Norwegian kroner, it also becomes cheaper. In other words, when another central bank sends a signal about even more interest rate increases than our central bank, it helps to keep the krone exchange rate down. This so-called “interest rate differential channel” seems to be more in the wind again in the foreign exchange market, where the capital flow goes into currencies where you get a higher interest rate on your money. Right now, the market expects an interest rate peak of 3.75 per cent in Norway, 4 per cent in Europe and 5.5 per cent in the USA. Currency strategist Dane Cekov at Nordea Markets points out that the interest rate differential between the krone and the euro has suddenly become negative for the first time since before the financial crisis. If the market believed that Norges Bank stopped raising interest rates at three or 3.25 per cent, we would have had an even weaker krone than now, he believes. Rarely a lot of uncertainty Every time there is a big, negative event that affects the financial markets – you can be pretty sure that the krone will become less valuable. Have you perhaps heard the term risk appetite? The mood in the financial markets affects the krone. Photo: Simon Skjelvik Brandseth / news The Norwegian krone is a tiny currency, which is considered very uncertain and risky to invest in. When there is a lot of fear and uncertainty, investors do not want to buy Norwegian krone – and then they become less valuable. They then prefer to buy major currencies that are seen as more secure, such as the euro and dollar. There was extremely great uncertainty in 2022, and there is still uncertainty, particularly related to how the rapid interest rate hikes will affect the world economy. In other words, the risk appetite is not quite at its peak. The krone and oil are closely linked The Norwegian krone is very closely linked to oil. This summer, the price of North Sea oil was almost 130 dollars a barrel. Now the price is just over 80 dollars a barrel. The oil price has a lot to say for the krone. Photo: news The weaker oil price has thus also contributed to weighing down the krone exchange rate. The reopening of China gives faith in growth in the world economy, and thus also increased oil prices – because economic growth leads to increased demand for oil for transport, production and as an input factor in the production of a number of goods. This could mean a stronger krone in the long term. A lot of good with a weak krone… For the Norwegian economy, the fact that the krone is weak has many positives. The Norwegian export industry benefits from the fact that it is paid better for the goods it sells abroad, and thus makes more money. In a normal situation, all Norwegian companies that make a living by exporting their goods abroad will prefer a low krone to a high one. There is, however, a limit. If the krone moves a lot in a short time, it creates great unpredictability for Norwegian companies. Planning budgets and future investments becomes more difficult. In addition, Norges Bank points out that a weaker krone could lead to increased wage growth, because industry’s ability to pay is improved. Price and wage growth can become self-reinforcing. …but also quite a bit negative. If the krone stays at its current level, we will notice it, among other things, through the goods we buy in Norwegian shops becoming more expensive. Almost everything we consume in this country is bought from abroad. Clothes, cars, cosmetics and electronics are brought in from abroad – and bought in either dollars or euros. The increased cost will be passed on to you and me. Then our purchasing power, what we get back for every kroner we earn, becomes less. Interest rate increases continue with full force The Norwegian economy has fared surprisingly well through the winter, and the figures for both house prices, growth and trade have been better than feared. Not least, the labor market is still rock solid. As long as the vast majority of people have a job to go to, Norges Bank can safely tighten the interest rate screw a little more. If they don’t, a lot can go wrong. In the annual report in mid-February, central bank governor Ida Wolden Bache said that if the participants in the currency markets do not have confidence that monetary policy will be tightened when inflation increases, the krone exchange rate may weaken. This will therefore result in increased prices, what we call imported price growth. Central bank manager Ida Wolden Bache Photo: William Jobling / news Many economists are now pointing out that the weak krone is one of several solid arguments for Norges Bank having to adjust its interest rate forecast in March – and several of the brokerage houses believe in four interest rate hikes until now before the summer, to 3.75 percent. Then suddenly we are at a mortgage interest rate of well over five percent, a level we have not been close to since the financial crisis in 2008. All you have to do is enter the figures into your own mortgage budget already now. Interest calculator The calculator uses the formula for annuity loans to calculate your monthly costs. Nominal interest is used here. This means that there will be an additional transaction fee which will vary from bank to bank. Today’s interest rate is taken from DNB’s mortgage interest rate for young people, and different banks will have different interest rates. The figures given here will therefore be approximate for you. Monthly expenses are interest and repayments combined. Read more about sources and reservations here. See how much you have to pay if the interest rate increases.
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That is why the crown is so weak – Speech
