December 8, 2021

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Interest and currencies, NOK |  Norway bank accuses roulette

Interest and currencies, NOK | Norway bank accuses roulette

Chief Economist Jan Ludwig Andreessen at Ica Group believes that Norges Bank is playing a game of Kroner roulette with the announced increases in interest rates.

Andreessen told Nettavisen yesterday that he wants one Break the interest rate of the Norges Bank. Central Bank announced Up to seven interest rate increases over the next three yearsThe chief economist fears that this will result in a very strong krone. The krone has now reached its strongest level against the euro since the summer of 2019 (see chart below).

In his blog, the chief economist goes further. Here the title is used «Bank of Norway at the roulette table», as if the central bank’s interest rate policy is a bit risky.

Andreassen symbolizes roulette with Dostoevsky’s short story “The Player”, in which the patriarch of a Russian noble family on a spa vacation in Europe loses all his fortune. The chief economist thinks Norges Bank is putting too much emphasis on its own forecasts.

Also read: Chief Economist Jan Ludwig Andreessen shakes his head at state budget: – Spenfell estimates

Think of the risk

– I did a great Norges Bank analysis in a total of five blogs, which I am very pleased with. What I am constantly trying to say is that Norges Bank should consider risk scenarios. Creating an interest rate path that matches expectations is not so important.

It is critical to have an interest rate path that adapts to the risk profile of the Norwegian economy. One of the biggest risks to our foreign economy is the krone exchange rate. An offshore current account surplus could be 15 percent of GDP, Andreessen told Netavizen Okonomi.

– And how strong is the fear that the krone will become after that?

– Now we have an oil-powered crown and interest. Norges confirms that interest rates should normalize, but I think they should change their exchange rates this year and next. I think we can see 9 kroner against the euro already at the beginning of the year.

Read also: Senior Economist: – Get the politicians out of Oslo and save 30 billion

In Euro: 8.50

– In the long run, I see no reason for a weaker krona than the average we had in the 2000s. Then we’re going to 8.50. The green crown is weaker than the oil crown, and it is very important that we get a weak crown for the green change.

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Andreessen says the 8.50 kroner would be too heavy for the industry and green turnaround. The central bank signaled a new rate hike already in December, which the chief economist believes should be cancelled. But then there should be plenty of interest rate signals at the so-called interim meeting in November.

– If Norges Bank raises rates in December, I’m afraid we’ll get even more skyrocketing on the krone. Norges should now sum up a little so we don’t get any more rate hikes, but until then, the krone could be on its way to 9 kroner against the euro.

two effects

– And what does that mean for Norwegian business?

– It will have two effects: all competitive business, including cottage development, will determine a penny in the 80s. The second effect is on the consumer price index. We will get deflation (low prices, editor’s note) in Norway in 2022 and 2023 if the kr remains at 9 kroner. This is because core inflation is very low in the first place.

We haven’t seen a downturn in Norway since the 1920s, which led to a recession. When prices are falling and prices are expected to fall, businesses and households will be cautious about consumption and investment. It will lead to an intensification of deflation in the economy.

Central to Andreessen’s concern is the interest rate differentials with Europe, which has not been an issue in the foreign exchange market for several years. A high interest rate in Norway can attract unwanted interest from foreigners and send the krone to heaven.

Read also: Krone strengthens after interest rate hike

obvious difference

– There was no correlation between interest rate differentials and the krone exchange rate in the years 2016 to 2019, and one might get the impression that there is absolutely no correlation, but it is.

For government securities maturing in 3-4 years, the interest rate differential is close to 2 percentage points versus Germany, and there is a significant difference in the interest rate. And Andreessen stresses that the difference between Switzerland and Denmark is greater.

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It indicates that the saving rate in all countries has increased. Amounts equivalent to 10,000 billion kroner are “a worrying account in Europe” with negative interest rates, Andreessen says in the blog. He believes that some of these funds could quickly find their way to Norway. Few central banks are planning to increase interest rates.

The chief economist thinks things have really gotten worse since the first rate hike on September 23. The krone strengthened 3 per cent against the krone weighted index of imports, so there is every reason why the Bank of Norway is taking a breather from raising rates.

Irresponsible

– It is an irresponsible business with the extra increments, and Norges Bank should be careful to use the word “normal”. We are a small country in a sea of ​​negative interest rates, we just have to accept that. I think it is clear that all macroeconomists should understand that as interest rates increase, we risk a depreciation of the krone in the 1980s, chief economist at Eika Gruppen once again warned.

Norway has a two-part economy. According to Andreessen, a strong krone would not be a problem for the energy industry, as it has margins to withstand the strong krone exchange rate. But most of the Norwegian business community is highly vulnerable to competition, and a very strong krone weakens competitiveness.

– So, a very strong krone is a pity for long-term business development and green transformation in the medium term. The “green” krone should be 11 to the euro.

– We live on the lie of life and we must become more aware. Andreessen says that Norwegian macroeconomists are trying to forget about the so-called monetary policy dilemma.

Read also: The money party is over – Erna is tight

Three terms

– And what is the dilemma?

– That there are three factors that the Norwegian Bank must take into account: free movement of capital, interest rates and exchange rates. They could only decide to control the two of them. The last variable becomes free and cannot be controlled.

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With free capital movements between countries and a controlled interest rate, you have to tolerate that the last variable, the krone exchange rate, can get out of hand.

Andreessen says there are various risks to the Norwegian economy, such as the stock market crash, wars abroad and the krone exchange rate. In terms of internal affairs, we have a new government, but there are few indications that they will come up with anything revolutionary.


wage settlement

– Political risks have been reduced. The biggest risk that many central bankers fear is that wage adjustment will take off in full. Andresen says the acid test next year will be wage settlement, and that’s a real dilemma.

He believes that we can live with a major settlement in the middle of the third century, because the total settlements in 2021 and 2022 do not give any improvement in purchasing power. This year, purchasing power will decrease as a result of higher inflation rates due to electricity prices.

– But there are problems with the delivery of many goods now, which could lead to higher prices?

It is temporary and will transcend everything other than raw materials and energy. It has been underinvested, and investments in clean energy are minuscule compared to investments in hydrocarbons. Andreessen says we should have three times more investment in renewable energy.

The price of oil is the reason

Another chief economist who was in contact with Netavizen cited the rise in oil and gas prices as the main reason for the rise in the krone. Andreessen also believes that we will have higher oil prices and higher gas and coal prices in the future.

There are many factors that have affected the krona. But regardless of whether the base oil price is $60, 70, or $80 a barrel, we get a pretty solid operating balance. Andreessen predicts that foreign trade is very strong at the moment, and with the latest appreciation of the krone will be even stronger.