Embassy, Oslo (Netafsen): During the Eiendom Norge conference on Tuesday, Central Bank Governor Edda Wolden-Basche spoke about monetary policy and the economic situation.
-We do not manage according to the krone exchange rate target. “But we are concerned about that,” she added.
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The weakest since Christmas
Last week, the krone exchange rate was at its lowest levels since before Christmas. It was then at its weakest level before interest rate hikes in December, measured against the currencies of Norway's most important trading partners.
The krone appreciated significantly after the latest interest rate hike on December 14, and has remained strong for about two weeks. Since then, it has slowly but surely fallen again, as measured by the I44 index, one of Norges Bank's favorite indicators of krone strength.
So far this year, the krone has fallen by 8.21 percent against the dollar, to 11 Norwegian kroner, while one euro is worth 11.73 Norwegian kroner, a 4.5 percent decline since the new year.
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This creates problems for Norges Bank, as a weak krone makes goods coming from abroad more expensive.
– There is no doubt that last year we saw a higher increase in prices as a result of the krone exchange rate. That made evaluations difficult, Welden Bash said.
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– The krone exchange rate was punished
In a recent report filed on Wednesday, chief strategist Dain Sikov at Nordea Markets says the krone exchange rate gained a better footing at the start of the year after Norges Bank took an anti-grain stance and raised interest rates in December. The central bank then moved against this flow, because it happened at the same time that central banks in other countries stopped and started talking about interest rate cuts.
At the beginning of the year, interest rate market participants believed that the US central bank, the Federal Reserve, would cut its key interest rate six times this year starting in March.
– After three months of higher-than-expected inflation numbers, there have now only been two US interest rate cuts this year.
The dollar has fallen by 83% since April 2014, and 8% since the new year alone.
– The krone exchange rate has been punished, weakening in particular against the US dollar, but also against the euro. This is despite the rise in oil prices and stock markets so far this year, Sikov wrote in the report.
As for Nettavisen, Sikov describes the decline in the Norwegian krone as “violent,” and Norwegian tourists to the United States will have to rely on dollars at the eleventh for some time to come.
In addition, prices in the United States of America increased by 7 percent. He says it might be a good idea to take your vacation to another country, in Norway, or, for example, to a country in the Balkans.
And if anyone had a doubt, Chekov had no doubt at all:
– The Federal Reserve (the US central bank) is running the show! We won't get a much stronger krone without a broadly weakening dollar. Unfortunately, this is difficult to envision in the short term.
Sikov believes that this shows that in order to strengthen the krone exchange rate, assistance must be received from abroad 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, increasing geopolitical tensions, especially the situation in the Middle East, constitute a major risk factor.
If the conflict spreads to the Middle East, we could quickly witness a new shock in energy prices.
He also writes that the world's central banks may face rising energy prices and increased price growth as interest rates continue to rise.
The past two years have shown that the krone exchange rate does not necessarily emerge stronger from a strong rise in energy prices.
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Dream scenario
The dream scenario for the krone exchange rate, Sikov writes, is that continued low inflation leads to lower interest rates abroad, while international economic activity rebounds and energy prices rise.
But such a scenario may have become less likely recently.
Nordea Markets still believes that price growth abroad will moderate, although it will take some time. They also believe that central banks will have room to gradually lower interest rates.
– This is the main reason why we should not give up hope for a somewhat stronger krone eventually.
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