EMBASSY, OSLO (Nettavisen): During the Eiendom Norge conference on Tuesday, central bank governor Ida Wolden Bache spoke about monetary policy and the economic situation.
– We do not manage according to a target for the krone exchange rate. But we are concerned about it, she said.
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Weakest since Christmas
Last week, the krone exchange rate was at its weakest since before Christmas. It was then at its weakest before the interest rate hike in December, measured against the currencies of Norway’s most important trading partners.
The krone strengthened considerably after the last interest rate hike on 14 December, and it remained strong for around two weeks. Since then, it has slowly but surely weakened again, measured against the I44 index, which is one of Norges Bank’s preferred indicators of the krone’s strength.
So far this year, the krone has weakened by 8.21 per cent against the dollar, to NOK 11, while one euro is worth NOK 11.73, a decline of 4.5 per cent since the New Year.
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This creates problems for Norges Bank, since a weak krone makes goods from abroad more expensive.
– There is no doubt that last year we had a higher price increase as a result of the krone exchange rate. That made the assessments difficult, said Wolden Bache.
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– The krone exchange rate has been punished
In a recent report presented on Wednesday, senior strategist Dane Cekov at Nordea Markets says that the krone exchange rate gained a better footing at the start of the year after Norges Bank went against the grain and raised interest rates in December. Then the central bank went against the flow, because it happened at the same time as other countries’ central banks stood still and started talking about interest rate cuts.
– At the start of the year, interest rate market participants believed that the US central bank, the Federal Reserve (Fed), was going to cut the key interest rate six times this year from March.
– After three months of inflation figures that have been higher than expected, there are now barely 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 has been punished, and weakens in particular against the US dollar, but also against the euro. This 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 drop in Norwegian kroner as “violent”, and Norwegian tourists to the USA will have to count on dollars in the 11s for some time to come.
– In addition, there is the price increase in the USA, which is 7 per cent. It might be a good idea to take your holiday to another country, in Norway or, for example, a country in the Balkans, he says.
And if anyone was in doubt, Cekov is not in the least bit in doubt about the following:
– The Fed (the US central bank) runs the show! We are not going to get a significantly stronger krone without the dollar weakening broadly. Unfortunately, it is difficult to envision in the short term.
Cekov believes this illustrates that in order for the krone exchange rate to strengthen, help must be received from 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 tensions, particularly the situation in the Middle East, are a major risk factor.
– Should the conflict in the Middle East spread, we could quickly get a new energy price shock.
He further writes that the world’s central banks may face higher energy prices and increased price growth with still high interest rates.
– The last couple of years show that the krone exchange rate does not necessarily come out stronger from a strong rise in energy prices.
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The dream scenario
Cekov writes that the dream scenario for the krone exchange rate is that continued lower inflation results in lower interest rates abroad, while international economic activity picks up and energy prices are high.
– But such a scenario has probably become less 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 room to lower interest rates gradually.
– That is the main reason why we are still not giving up hope of a somewhat stronger krone eventually.
