November 27, 2021

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– Made some noise in the market – E24

According to an economist at DNB Markets, Norges Bank’s explanation for the sudden halt in krona purchases is not good enough.

NORGES Bank thinks it’s unclear: Kyrre Aamdal, DNB Markets.

Posted: Posted:

– When you receive such sudden messages, especially at the end of the year, it has made some noise in the market. Hence perhaps it would have been reasonable for them to provide a little more complete information on why they were making these changes in estimation, says chief economist Keri Amdahl of DNB Markets at E24.

He is responding to the explanation given by the Bank of Norway on Thursday when the central bank suddenly announced a complete moratorium on krona purchases. It happens just three weeks after the central bank made a significant reduction in purchases.

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Changes in krone purchases in the middle of the month have occurred before, but they are not uncommon, Amdahl notes.

– When they do this, it means that they have received new information. Then we move on to the second problem, which is that what they transmit seems a bit unclear, he says.

A sentence that doesn’t say much

When the central government’s kroner revenue is not large enough to cover the central government’s budget deficit, the so-called oil-adjusted deficit, the task of the Norges Bank is to buy the kroner on behalf of the central government to fill the gap.

This was the case in recent years, but it has now stopped.

The Norges Bank justifies this with “a higher-than-expected net cash flow from the petroleum business”, after oil and gas prices rose sharply.

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However, this information is not enough to explain why the Bank of Norway suddenly had to change its krone purchases, Amdahl believes.

The cash flow consists of income in foreign currency from the government’s direct financial participation in petroleum activities (SDFI), as well as income in kroner when oil companies pay taxes and the government receives Equinor’s dividend.

When cash flow rises, it’s the last part, the krone income, that affects krone purchases, according to DNB Markets economists.

He confirms that the krone income has already been known for a long time.

The vast majority of krone income is tax payments from oil companies and dividends from Equinor. There is no new information about this November. They knew all the krone payments after the oil tax was paid in October.

Call for more information.

– I think they could have come up with more details about the reason for the changes, rather than a sentence that doesn’t say much, which opens the door for further explanations.

A little weak confidence in the krone

According to Amdahl, there are three possible explanations:

One is that they lingered a bit, didn’t keep track of their liquidity stats well and didn’t fully understand how much the krona had income.

Another possibility is that Norges Bank has received new estimates of the oil-adjusted deficit, which in this case will affect the amount of kroner to be purchased, according to Amdahl.

– The third possibility is that the SDFI, which usually has mainly foreign exchange earnings, also received krone income, which was not previously calculated.

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After news of the halt in krone buying, the Norwegian krone fell on Thursday afternoon and evening. Amdal links weakness to the announcement of the Bank of Norway.

It is preferable to avoid increasing fluctuations in the krone in general. Especially if it can be avoided with clearer communication.

This means that hedging costs will be higher. Slightly weak confidence in the krone as an investment currency.

Norges Bank: – Tracks current flows

E24 asked Norges about the new information they had received, making such an abrupt change necessary.

E24 also wondered if communication about the cause of the changes could be made more clear, and whether any of Aamdal’s three possible explanations are correct.

Norges Bank does not directly answer the questions, but writes the following:

Norges Bank follows the flows in the petroleum fund mechanism on an ongoing basis and assesses the impact of new information on foreign exchange transactions on behalf of the country, press officer Bård Ove Molberg wrote on Friday afternoon.

Actual transfers between the state and the GPFG are determined by the Ministry of Finance on the basis of its estimates of net cash flow and oil-adjusted deficits, he writes.

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It’s good that they take action right away

Amdahl’s fellow industry, interest rate strategist Lars Moland at Nordea, has a different view.

– It’s a little special that they do this in the middle of the month, they usually don’t. But I think it’s a good idea that they do – take action immediately when they have a new analysis on the table and not say we can’t do anything about it until 14 days later.

Moland cites several factors that reduce the need for krone purchases, including lower budget deficits and higher oil revenues.

– We believe these things ensure that Norges Bank will start selling krona and not buying krona. This must start as soon as possible.

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