June 28, 2022

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Rising US interest rates could weaken the krone - E24

Rising US interest rates could weaken the krone – E24

The US Federal Reserve can create turmoil in the markets and send foreign currency investors to safe havens such as the dollar. It could lead to a higher cost of traveling abroad, says a consumer economist.

Powell in focus: On Wednesday, the market turned its attention to US Federal Reserve Chairman Jerome Powell, who a majority expects to raise US interest rates further.
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There are two things in particular worth pursuing next week, according to consumer economist Derya Incedursun at Nordea: Survey from Norway’s regional network and interest rate decision from the US Federal Reserve, the Federal Reserve (Fed).

– It is important to keep track of what the Fed is doing, as Norway is greatly affected by what is happening internationally. When the Fed raises the rate, the rate here at home could also be higher, Incedursun told E24.

In May, US Federal Reserve Chairman Jerome Powell made an unusually strong interest rate move to stagnant fiery inflation: He raised rates by 0.5 percentage point, a move that had not been done in 22 years.

On Wednesday, a majority expects Powell to raise interest rates by a new 0.5 percentage point, according to Chief Economist Marius Gunsholt Hof at Handelsbanken.

Some believe the central bank may raise it further, according to Reuters.

Just before the weekend came the inflation figures for May, which fell to a surprisingly high 8.6 percent.

Powell writes that what Powell wants to say about potential interest rate increases during the summer and fall may be of more importance to markets than the rate hike itself. CNBC.

Anders Johansen, chief strategist at Danske Bank, is also excited about what Powell has to say about the upcoming meetings.

– Will they continue at 0.5 per cent in September or is it appropriate to subtract 0.75 per cent on one of these? I think they lasted 0.5 percent longer than taking 0.75 in one go, says Johansen.

– This is because there are signs that the economy is slowing down and they are likely to continue making assessments from one meeting to the next.

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Consumer economist Derya Incedersun notes that a weaker krone exchange rate is positive for the export sector, but it could also lead to a higher cost of travel abroad.

May affect the krone exchange rate

Higher interest rates in the US could lead to turmoil in the markets, according to Nordea’s Incedersun. It will not affect the stock exchange in Norway to the same extent, but the krone exchange rate may be affected.

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The Norwegian krone is a small currency. When we are now in a period of fear and uncertainty, investors often choose to buy the Euro, Dollar and Pound rather than the Norwegian Krone, as the bigger currencies are seen as safer.

The consumer economist notes that the weaker krone exchange rate is positive for the export sector, as Norwegian goods become cheaper abroad. This, in turn, can lead us to sell more and get more jobs.

– At the same time it exceeds the imported goods. There will be more expensive items in stores. Insederson says the weakness of the krone can also lead to the higher cost of traveling abroad.

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Also in the UK and Japan, the central banks will be making new interest rate decisions this week.

Like many other countries, the UK also suffers from high rates of inflation. Thus, many eyes were focused on BoE Governor Andrew Bailey and the tactics he chooses to follow on Thursday.

In the UK, interest rates are now at one percent – the highest in more than 13 years.

Despite the fact that the Japanese yen hit a 20-year low against the dollar last Tuesday, the Bank of Japan will apparently keep the interest rate unchanged at −0.1%, according to Bloomberg.

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Business comes with financial prospects

The day before the big US interest rate day, Norges Bank reports on its regional network arrives. There, 300 companies and organizations report on their views on economic development and prospects.

It will give important signals to the Norges Bank, which is likely to raise interest rates again on Thursday, June 23.

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“We overestimated the economy by lowering interest rates, and that increased demand for goods and services, which in turn contributed to higher prices,” Insederson said.

What we can expect now, according to Incedersun, is that corporate profits will be weaker, there will be less sales and therefore less labor demand.

This means unemployment will rise slightly, but higher interest rates are needed to stabilize the economy. She says this is the best thing for Norway in the long run.

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Statistics Norway expects a double-digit rate hike in Norway in June

The standard practice of the Bank of Norway is to raise the interest rate by 0.25 percentage points. Now, however, more people believe that Norges will raise the rate twice this time, that is, they will raise it by 0.5 percentage point.

The reason is that inflation rose to its highest level since 1988 in May.

Prices were 5.7 percent higher in May than in the same month last year. At the same time, core inflation (inflation excluding electricity and tax changes) rose to 3.4 percent. The latter is what Norges Bank looks for when setting interest rates.

— That’s much higher than Norges Bank had envisaged, chief economist Marius Gunsholt Hof told E24 on Friday, citing Norges Bank’s estimates with core inflation of 2.6 percent.

However, Danske Bank believes that the central bank Not It will raise interest rates by 0.5 percentage point on June 23. Chief Economist Frank Glum thinks Norges Bank will raise at its interim meeting in August rather than twice now.

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Inflation has risen to its highest level since 1988