– Difficult to explain all movements – E24

The weak krone was one of the topics when central bank governor Ida Wolden Bache met on Tuesday for a hearing in the Storting’s finance committee.

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The Finance Committee’s hearing was about the Financial Market Report for 2024. In the annual hearing, the governor of the central bank explains, among other things, Norges Bank’s work with monetary policy.

Among the topics raised was the weak crown. Over the past ten years, the krone has weakened considerably, which has left analysts scratching their heads.

– How difficult is it to be sure what is behind the development in the krone exchange rate?

– It is difficult to explain all movements in the krone exchange rate, especially from day to day and week to week, says Bache to E24 after the hearing.

Bache points out, among other things, that different interest rates in Norway and other countries have an impact on the krone exchange rate.

But the relationships are not necessarily stable over time.

– There are many other factors that can be important. And there may be slightly different themes that affect the currency market at different times.

Weaker krone without a jump in interest rates

Storting representative Hans Andreas Limi (Frp) asked during the hearing about future developments, measures that may affect the krone exchange rate and whether the weak krone today is the new normal.

The governor of the central bank responded by pointing out that there is uncertainty about the exchange rate going forward.

– We do not manage according to a target for the course. It is the key interest rate that is our means of action. The policy rate has an effect on the exchange rate. We believe that we have good evidence for that, she said.

– If we had not raised the interest rate in recent years, the krone exchange rate would have been weaker.

Bache also pointed out that confidence in the inflation target helps to stabilize the exchange rate.

– In such a way that the actors in the foreign exchange market can use it as a basis. If they had not had such confidence, then we could have risked that the krone exchange rate would have weakened much more.

Bache said that what is a normal level for the krone exchange rate is a question where it is not possible to find an answer with two dashes underneath.

Storting representative Tellef Inge Mørland (Ap) asked to what extent the weaker krone exchange rate is due to political conditions.

– We are talking to international banks that operate in this market. That is not what they are primarily pointing to, replied Bache.

– They point to precisely this type of factor to which I refer. Interest rates, oil prices and also conditions in the financial markets. They also point out that not all the explanations lie in specifically Norwegian conditions, she said.

A number of actors will make statements during the hearing, including Finans Norge, Finansforbundet, Eiendom Norge, the consumer organization Huseierne and Sparebankforeningen.

Unusually weak crown

In recent weeks, the krone has traded at some of its weakest levels so far this year. The dollar exchange rate was at its worst at well over NOK 11, while the euro exchange rate was up to NOK 11.85.

Following Norges Bank’s signals at the interest rate meeting last week, the krone has strengthened somewhat, but rates are still at levels that had never been seen in the time before the corona crisis set in in 2020.

The krone has remained unusually weak over the past few years. Throughout 2023, the krone became far weaker than Norges Bank had expected, and this led to far more interest rate increases than the bank had initially envisaged.

Could have raised faster

In April, the government published this year’s edition of the Financial Markets Report.

It points out that the differences in interest rates between Norway and abroad may have contributed to the krone weakening as much as it did.

In the winter of 2022/2023, for the first time in several years, Norway had a lower policy rate than its trading partners, after several countries’ central banks had increased interest rates at a rapid pace.

“It refers to Norges Bank Watch which pointed out that in 2023 Norges Bank was constantly surprised by the weak krone and that it would have been possible to raise the interest rate faster and earlier,” writes the Ministry of Finance in the report.

“The department assumes that the bank assesses in more detail whether the development in the interest rate and the krone exchange rate through 2023 can provide a basis for new knowledge,” writes the ministry.

Could have 8 percent interest

There has been much discussion about monetary policy after the interest rate has been raised from zero to 4.5 per cent since the autumn of 2021. LO has believed that the bank should have held back on the increases, a criticism which the governor of the central bank rejected during his annual speech in February.

According to the Financial Market Report, Norges Bank appears to have taken different considerations into account when setting interest rates than it has traditionally done. The interest should have been higher if you look at Norges Bank’s simple interest rule.

“If the bank had set the interest rate in line with this simple rule, the policy rate would have been set at over eight per cent”, writes the Ministry of Finance in the Financial Markets Report.

“When the bank increased the interest rate less than both the model and the simple interest rate rule would indicate, it may be an expression that the bank placed a relatively large emphasis on the consideration of high and stable production and employment, as Norges Bank Watch also points out”, wrote the government.

The Ministry of Finance pointed out that this could also have been an expression that the bank was unsure of the impact of a rapid interest rate increase on the real economy, something the bank also pointed out in its communication.

“At the same time, the bank may have considered some of the driving forces behind the high inflation to be temporary,” the government wrote.