In May, 1 euro cost a whopping 12.1 Norwegian kroner. As the Wednesday morning again cost more than NOK 12, it is only the third time something has happened. The second time was in 2020, at the start of the pandemic. What makes the krone so weak, and what is happening in the market? There are several factors that form the backdrop for the current situation, according to Nils Kristian Knudsen. He is an interest rate and currency strategist at Handelsbanken, and explains: There has been great uncertainty linked to inflation, which has been at the highest level for several decades. As a response to inflation, the central bank has raised the key interest rate a lot in a short time to bring it down. There is also an uncertain connection to the further development of interest rates. The financial markets tend to move capital to where they expect the highest return, greatest predictability and lowest risk. – This is the situation we are in. And here the Norwegian krone is particularly vulnerable, says Knudsen. VULNERABLE: The Norwegian krone is particularly vulnerable, says Nils Kristian Knudsen from Handelsbanken. Photo: news Why is the Norwegian krone so vulnerable? The Norwegian krone is very sensitive to changes in the global economic situation. It tolerates fluctuations in the financial market, interest rates and the stock market poorly, explains Knudsen. – Fluctuations and uncertainty in these areas are often particularly bad news for the krona. It is also worth mentioning that the oil price often has a lot to say about the krone exchange rate. Oil prices have fallen by more than 10 dollars a barrel in recent years. This is also due to uncertain links to the global economy and oil demand going forward, explains Knudsen. – Thus, the krona is particularly suffering from the uncertainty we have brought us. Historically, it can be said that the Norwegian krone is among the currencies I follow the most, which fluctuate the most when uncertainty is greatest. New normal Among the largest currencies, the Norwegian krone is among those that have weakened the most. The exchange rate has weakened by around 20 percent against the euro in recent years. It has also lost 25 percent against the US dollar. – The krona is very exposed when there is uncertainty in the global economy and when energy prices fall, says Dane Cekov. He is a senior strategist and currency expert at Nordea Markets. NEW NORMAL: Senior strategist at Nordea Markets, Dane Cekov, does not think we will see 1 euro costing 8 kroner again. Cekov points out that the end of the year is usually a bad period for the krone. He also believes it may be further weakened in the short term. At the same time, he believes the situation will improve in the longer term. – When the inflationary pressure becomes less and the outlook for the global economy improves, I assume that the krona will strengthen. We will probably have to get used to the fact that 1 euro costs somewhere between 10 and 11 kroner, he thinks. But not 12 kroner, as today. Noregs Bank: “Good resilience” in the Norwegian economy On Wednesday, Noregs Bank presented a report in which they look at vulnerability and risk in the financial system. Overall, they find that there is “good resilience” in the Norwegian economy, although they consider that the risk is still increasing. The Central Bank also points to the fact that some people may have payment problems as a result of the price jump and sharp jumps in interest rates. In the report, they find that Norwegian households still have a lot of debt, and that rising interest rates mean that they have to spend more of their salary on it. This also leads to more people using savings. Norges Bank further points out that most households are able to service their debts, but that many will probably have to reduce consumption. OIL PRICE: The oil price often has a lot to say about the krone exchange rate. Here is the oil platform Statfjord A. Photo: Statoil/Equinor / Øyvind Hagen In the report they write that Norwegian banks are well equipped to tolerate larger losses. Interest rates have risen sharply in recent years. But in November, the central bank chose to keep the policy rate unchanged – at 4.25 per cent. The key interest rate has not been higher since 2008. The central bank has simultaneously announced that the interest rate may be raised to 4.5 per cent before the interest rate peak is reached, and that it will probably be raised in December. But: – If we become more certain that the underlying price increase is on the way down, the interest rate can be left alone, said central bank governor Ida Wolden Bache in connection with the interest rate meeting earlier in November. Policy rate The policy rate is Norges Bank’s most important instrument for stabilizing price growth and development in the Norwegian economy. The key interest rate in Norway is the interest that the banks receive on their deposits in Norges Bank up to a fixed amount – a quota. The key interest rate and expectations about future developments in the key interest rate primarily affect the interest rates between banks and the interest level the banks offer on deposits and loans to their customers. Market interest rates in turn affect the krone exchange rate, the prices of securities, house prices and the demand for loans, consumption and investments. Source: Norges Bank What does the krone exchange rate mean for the interest rate? In September, inflation decreased more than Norges Bank had thought and calculated. If this development continues, Knudsen believes there is an argument for leaving interest rates unchanged. – At the same time, the flip side of the coin is that the weak krone exchange rate we have today can give us higher inflation in the future. This is what I call “the split”. With the split, Knudsen believes that we do not know what inflation will be like before the interest rate meeting in December. When we don’t know this, we don’t know what the interest rate will be. When we don’t know what the interest rate will be, we get big fluctuations in the krone exchange rate. – It’s a fierce struggle. On the one hand, seen in isolation, lower inflation means unchanged interest rates. On the other hand, a weak krone, viewed in isolation, means higher interest rates. Knudsen further underlines that the krone exchange rate has actually been in a negative trend since 2013, although it has been in fits and starts. RATE JUMP: Norges Bank wrote in a recent report that some people may have payment problems as a result of the price jump and the interest rate jump. Here is Photo: William Jobling / news – But why is this happening right now? – It has enough to do with the fact that there have been terribly large fluctuations. Both in short and long interest rates. This leads to a high degree of risk aversion in the markets. Capital then flows towards the markets it is probably safest to be in. That is why the dollar is so strong, and the small currencies so weak, explains Knudsen. – So it’s not just in Norway that things are going badly. We see the same in Sweden, for example. On Wednesday afternoon, the price for a 1 euro sock is just under 12 Norwegian kroner.
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This is what the weak krone exchange rate can mean for interest rates – news Norway – Overview of news from various parts of the country
