SEB’s chief strategist believes the recent price shock has prompted Norges to resort to even more severe tightening, and it now expects to raise interest rates five times this year alone.
The strengthening of the krone accelerated ahead of next week’s interest rate meeting at the Norges Bank.
The price of one euro is 9.65 kroner on Monday morning. This is the lowest level since July 2019, and more than 30 euros cheaper than last week’s high, according to figures from Infront.
Erica Dalstow, chief strategist at SEB, explains the strengthening of the krone mainly as expectations of interest rate jumps from Norges increased.
– It is above all the interest rate differential and improved risk appetite that are the short-term drivers of the krone, she says.
On Thursday, the Norges Bank is likely to raise the interest rate to 0.75 percent from the current level of 0.50 percent, which was announced no later than January.
In countries that use the euro, interest rates are still high minus 0.50 percent, and an interest rate hike is not expected until the second half of the year at the earliest.
A stronger krone means that it will be cheaper to shop from abroad, but at the same time Norwegian export goods will be more expensive for foreigners.
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game changer
Immediately after the Russian invasion, there was little doubt in the market whether the March rate hike could be implemented. This has now been reversed.
This is partly due to a sudden big increase in prices both abroad and here at home in the wake of the pandemic and the war in Ukraine. In February, we saw the highest increase in food and drink prices in Norway in 40 years. Plus, we’ve seen a record hike in electricity prices this winter.
report from Norges Bank Regional Network It was a “game-changing factor,” indicating that inflationary pressure is stronger, broader and more consistent than previously expected, which is why we now see an increased risk of five rate hikes, says Dalstow.
This means that the interest rate will have to be raised at each of the major meetings of the year. In addition, the bank should resort to the rather unnatural step of raising interest rates at one of the temporary meetings.
In the bank’s latest forecast from December, there were three increases this year, with another increase to a peak of 1.75 percent by the end of 2024. On the other hand, the South Eastern European Bank believes that the peak will be 2.25 percent already in 2023.
Waiting for the message “hawks”
The SEB strategist sees limited opportunity for a further rally in the krone when the rate is actually raised by Thursday.
– The strengthening we saw reflects that the market is already anticipating a “hawkish” (in favor of higher interest rates, daily newspaper.) a letter from the Bank of Norway, she says.
– But it is clear that “vision is faith”, so when the Norges Bank offers, it can provide some additional support for the kroner.
Dalstø adds that the market is already pricing in four and a half rate hikes this year, meaning a 50/50 risk is expected for a fifth rate hike.
The chief strategist also highlights an increase in risk appetite in recent days, as an important support for the krone exchange rate. Stock markets in the US, Europe and here in Oslo rose significantly last week.
Recession risks
Currency analyst Danske Kristoffer Lomholt believes that the mood in the markets will be one of the most important driving factors for the krona going forward.
We expect the krone to weaken somewhat against the euro over the coming months to 10.00, due to the increased risks of a global recession, he wrote in a recent analysis.
Lumholt stresses that the war has made the outlook for the krona extraordinarily uncertain, and that a global recession with market risk concerns could send the krone much weaker than this.
In times of great turmoil, investors prefer safer investments such as gold, dollars and government bonds, in favor of Norway’s relatively small currency, which can be hard to get out of if it really bounces back.
Higher oil prices can also be positive for the krone, both directly and indirectly. When oil companies on the Norwegian shelf get higher returns due to higher prices, they must also buy more kroner to pay the oil tax.
In addition, higher oil prices are generally positive for the Norwegian economy, because central government revenue is increasing, and so is the view of the krone exchange rate.
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