Nordea economists: Bank of Norway must go back to doubling interest rate increases if it wants to slow krone depreciation

Nordea economists: Bank of Norway must go back to doubling interest rate increases if it wants to slow krone depreciation

Status updated.

The Norwegian krone has weakened significantly this year, and it has not been this weak since April 2020.

Nordea economists expect the Bank of Norway to have to double its interest rate hikes if it wants to slow the devaluation of the krone, according to Wednesday’s update.

They write that the devaluation of the krone is probably the Bank of Norway’s biggest concern right now.

“New shot from the bow”

Currency analyst Niels Christian Knudsen at Handelsbanken Capital Markets believes that the weakness is related to commodity prices and not least to the strength of the US dollar.

So far this year, the US dollar has risen nearly ten percent, and got more support after the governor of the US central bank announced Tuesday night that the peak in interest rates may be higher than previously thought.

– You have a fairly strong strengthening of the dollar. Now the market has become more fragile. This is a very bad background for the krone, says Knudsen.

He says the US central bank governor’s statement yesterday was “another shot from the bow”.

– There is a great deal of uncertainty about whether inflation will continue, and where interest rates will peak. If this volatility and uncertainty increases, Knudsen says, then global market turbulence will increase.

– great contribution

Chief Economist Odmund Berg at DNB Markets points out that there are no clear reasons why the krone would be so weak, apart from the fact that interest rate differentials between Norway and abroad have increased.

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He says that one usually points to the price of oil or weaker risk sentiment when the krone weakens, but so far there is no reason to suggest that the weakness will be very significant.

– We are baffled by the level and the recent remarkable moves. We expect that the isolated effect of the krone exchange rate on the path of the interest rate will cause it to rise by 0.25 percentage points. Berg says that a weaker krona increases the odds of inflation, and contributes significantly to the path of interest rates.

He confirms that DNB Markets has not adjusted its interest rate path upwards, which until today expects a peak of 3.5 percent, but the weaker the krone and the longer it holds, the higher the upside risk, he adds.

– Obviously, if the krone weakens further in the coming months and remains weak, we may raise interest rate expectations. That’s the way it goes, Berg says.

If the kroner exchange rate is kept low, this could lead to an increase in inflation and further pressure on the Norwegian economy. One consequence is that the prices of imports will rise, while at the same time exports will become cheaper.

– Export industries will be able to experience stronger demand, and this can lead to more activity in the economy and more price pressure in the economy again, Berg adds.(conditions)Copyright Dagens Næringsliv AS and/or our suppliers. We’d like you to share our statuses using links that lead directly to our pages. Reproduction or other use of all or part of the Content may be made only with written permission or as permitted by law. For more terms see here.

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