January 30, 2023

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holiday, consumer | Miserable kroner news for southern Norwegian tourists

On Thursday afternoon, the cost of buying one euro was NOK 10.82. The last time the krone was so weak against the euro was on December 21, 2020, according to data from Infront.

This means that Norwegians who currently vacation in euro countries, including classic southern countries such as Spain, France, Italy and Greece, can have a summer vacation that is historically very expensive, he writes. The newspaper online.

On Friday, the krone recovered somewhat, and now costs NOK 10.78 per euro. A weaker krone makes Norwegian goods more competitive abroad, but we are affected in the form of higher import prices and, for example, expensive holidays abroad.

Nordea currency analyst Dean Chekov told Nettavisen that there are two important explanations for the krone’s weakness.

– Now at the beginning of the year, there is bad sentiment in the stock market. Yesterday we received the report from the US Central Bank (Federal Reserve, for short Fed), in which many members were clear that they are unhappy with how the market interprets their actions and what is priced in by interest rate expectations.

The prevailing sentiment in the market is the general mood. Where, among other things, the influence of psychology and interpretations. When stocks are going up, it is often said that there is positive market sentiment, and vice versa when they are down.

So one explanation is that the krone experiences fluctuations in risk sentiment.

The fact that central banks have been on the hawkish side and talked about higher interest rates and lower stocks usually leads to a weaker krone.

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“Hook” means that the central bank or its members believe that interest rates must be high to keep inflation low.

Winter is warm

The second explanation is associated with mild winter weather. Since Europe has had a good start to the year in terms of heat, you won’t need to make a fire as often as you do when it’s cold.

– This is one of the warmest winters in Europe in many decades. It then uses less gas for heating than normal, which causes the price of gas to drop, which in turn lowers the exchange rate of the krone.

When oil and gas prices rise, oil companies are forced to buy kroner in order to pay the government. The amount of krone purchases increases in line with their income.

Lower gas and oil prices mean fewer kroner are bought, which in turn affects the kroner exchange rate.

It makes the job more difficult for the Bank of Norway

Doesn’t a weaker krona mean higher import price inflation?

– yes. This makes Norges Bank’s job even more difficult. A weaker krone means higher import price growth, and about 33 percent of the base price growth is driven by what we import.

Rising rates are among the things Norges Bank looks at when considering whether to raise interest rates or keep them unchanged. The Consumer Price Index is used to measure inflation, which is when the prices of goods and services increase over time.

What measures the so-called basic price increase is the CPI-JAE. It is a measure of growth in consumer prices adjusted for tax changes and exclusion of energy products.

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Chuikov explains that the weaker the krone, the more difficult Norges Bank’s target of inflation to 2% becomes.

It can contribute to an increase in interest rates

Will it then be easier for the central bank to raise the interest rate?

– You can say that if they hadn’t raised the interest rate so much, we would have a big risk that the krone exchange rate would be weaker.

However, Norges Bank realizes that their work is becoming more complicated due to the weakening of the krone. They wrote this in the Monetary Policy Report from December, an economic report published four times a year by the Executive Board of the Bank of Norway.

– They saw interest rate differentials with other countries smaller. The Central Bank of Norway raised the interest rate in a short time, but compared to the United States of America where it raised the interest rate from zero to 4.5 percent in one year, the Central Bank of Norway raised it from 0.5 to 2.75 last year.

– The change for the US central bank is greater and it is more positive for the dollar.

Cekov explains that Norges Bank has indicated that the main reason they may continue to raise interest rates is because the krone exchange rate may remain weak, making what we import more expensive.

– At Nordea, we think the interest rate should be raised two more times, he says.