Signals from Norway’s central bank boss Øystein Olsen that the bank may even cut interest rates rather than raise them have boosted hopes for Norwegian exporters battling the ill effects of the country’s strong currency. Home buyers, though, will likely face even higher housing prices.
It currently costs only around 8.6 Norwegian kroner (crowns) to buy a British pound, just 7.5 to buy a euro and 5.3 to buy a dollar. That’s great for Norwegians purchasing goods or services from abroad, because the price in kroner is lower, but it’s terrible for Norwegian businesses trying to sell Norwegian goods and services to foreign customers. Norway has become even more expensive for foreign tourists, for example, and Norwegian exports are even more expensive than they might otherwise be.
Moreover, the foreign revenues they do take in amount to far less kroner than in earlier years when the krone (crown) traded at, for example, 12 to the pound and seven to the dollar. In the Norwegian ship brokering business, for example, brokers have traditionally earned flat commissions on deals done in US dollars. They stand to receive far less in kroner because of the weak dollar.
Plans by Norway’s central bank (Norges Bank) to raise interest rates were aimed at cooling down the hot Norwegian economy, and bringing rates back up to a more “normal” level than the record low rates of recent years. Bank officials and the state finance ministry have pegged a “normal” level at around 5 percent.
But with the rest of the world in deep economic trouble and facing staggering debt, the Norwegian central bank’s foreign counterparts are keeping interest rates low. Norway’s interest rates, even at the current key level of just 2.25 percent, are already high by comparison, making the country’s currency more attractive and further driving up its value. Any additional rate hikes would make Norway’s kroner even stronger against other currencies.
Central bank chief Øystein Olsen has therefore signaled that the bank board’s previously announced plans to gradually raise interest rates in Norway are now subject to reevaluation. In a lecture at the University of Oslo on Thursday, he told students that a krone that’s too strong can yield economic growth that, over time, is too weak. If the krone remains too strong, “it will be met with measures” in line with the monetary policy, he said. “In Norway, it’s the styringsrenten (the key lending rate) that is the instrument that can be used,” he added.
That was a clear indication the bank will use the key lending rate to tame the Norwegian krone. Olsen said that even though the local economy is robust, Norwegian business will feel the consequences of economic turbulence abroad. “I wanted to issue a reminder about the freedom we have in monetary policy,” Olsen later told newspaper Dagens Næringsliv (DN).
Stong krone ‘a catastrophe’
Norwegian businesses have already been feeling the effects of the krone’s strength at present. Jens Ulltveit Moe, a prominent Norwegian industrialist who, among other things, sells lifeboats in the export market, told DN the strong krone is “a catastrophe” that’s “killing our operations.” It’s hard to compete internationally with products made in a high-cost country like Norway that also are priced in a such a strong currency. A boat suddenly costs a lot more in euros or dollars than it would if the exchange rate wasn’t so onerous.
State statistics bureau SSB issued a warning this week that 4,500 industrial jobs will disappear over the next three years if the krone gets even stronger. And it may, even if interest rates remain unchanged.
Hotter housing market
Most economists think it’s unlikely Norway will see any direct intervention as has occurred in Switzerland, where the Swiss central bank decided that a euro should cost at least 1.2 Swiss francs. The Swiss currency, they say, was arguably overvalued while the Norwegian currency is pegged to the country’s oil wealth. Intervention can also be only a short-term remedy, they add.
Most think Norges Bank will now simply leave current interest rates unchanged, rather than resort to a direct cut. The central bank may also continue trying to “talk down” the value of the krone, like Olsen did on Thursday.
Homeowners with large mortgages can breathe easier, after months of warnings that they should be prepared for higher rates and, as a result, higher monthly mortgage payments. Home buyers, however, must brace for even higher housing prices. Low rates always boost the real estate market, which has been red hot in most Norwegian cities for the past few years. Prices, say analysts, are bound to keep rising, with state statistics bureau SSB predicting increases of 20 percent over the next three years.
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