It cost more than nine Norwegian kroner to buy a euro on Thursday, after Norway’s central bank cut its key interest rate. Norway’s currency fell in value against most others, too, making it worth almost the same as Sweden’s for the first time in years. The Oslo Stock Exchange was holding up, though, despite major declines on exchanges elsewhere that also are affected by plummeting values of oil companies.
The recent sharp fall in oil prices was singled out as the major reason for the Norwegian central bank board’s decision Thursday morning to cut interest rates by a quarter point, a move that had immediate consequences for currency exchange rates. Norway’s super-strong currency of recent years had already been battered before the interest rate cut was announced, and it lost quite a bit of value within minutes. Just over a year ago, it only took a little over five kroner to buy a US dollar, for example. By Thursday afternoon, the exchange rate was NOK 7.26, a level not seen since 2003.
The sagging value of the Norwegian kroner is a consequence of the sagging value of Norway’s oil. With the price of North Sea crude down by more than half from levels just last year, far less money is flowing into Norway’s state treasury. Norwegian oil companies, meanwhile, are left with high costs and ambitious new projects that no longer may be profitable. They’re cutting back, and that will have ripple effects on many other sectors of the Norwegian economy.
Panic breaking out
Thina Saltvedt, an oil analyst at Nordea, told newspaper Dagens Næringsliv (DN) this week that she sees ‘panic’ breaking out in the oil markets. The price of North Sea crude was down to USD 65 per barrel by midweek and Saltvedt thinks prices may sink down to the USD 40s.
“The mood is so negative in the market that it’s difficult to see the bottom,” Saltvedt told DN. That’s a sharp reversal from her predictions just a few weeks ago when she thought OPEC would cut production to boost prices up over USD 90 again. That didn’t happen.
In Norway’s oil capital of Stavanger, labour unions fear widespread layoffs, which in turn could spill over into other sectors and affect the real estate market. Economists have also predicted a downturn in 2015, albeit after years of record-high activity and growth.
All this contributed to the central bank board’s decision to cut its key lending rate from 1.5 percent to 1.25 percent, just a day after oil stocks had fallen around the world. Oil analyst Lukas Daul of brokerage firm ABG Sundal Collier in Oslo noted in DN Thursday that the collective value of oil-related shares traded on the Oslo Stock Exchange alone has evaporated by as much as NOK 250 billion (USD 35 billion) in the past year.
By mid-afternoon on Thursday, however, the main index of the Oslo Stock Exchange was mostly steady and Statoil had even logged a slight gain. Companies can benefit from an interest rate decline, and fund manager Jan Petter Sissener thinks the oil era is far from over. “Oil prices may fall to USD 50, but they won’t stay there,” Sissener told DN. “They’ll rise again.”
Currency brokers surprised
Currency brokers, meanwhile, were having a very busy day. They were surprised by the interest rate cut and the central bank board’s signals that rates may be cut again. Currency exchange analyst Magne Østnor of DNB Markets, which thought Norges Bank would keep rates unchanged, was instead following “major movement” in the currency markets Thursday. It wasn’t too long ago that a British pound only converted into a bit over nine Norwegian kroner. On Thursday, it suddenly cost Norwegians NOK 11.38 to buy a pound.
The declining value of Norway’s currency may result in fewer Norwegians heading for London or even just over the border to Sweden to go shopping. Pleasure trips abroad are suddenly more expensive than they were last summer, but export industries were cheering. Their goods and services suddenly aren’t so expensive for foreign customers, and they can boast of being more competitive. Østnor doesn’t think foreign traders are interested in the kroner, at least not now.
“It’s ‘hands-off,'” he told DN. “They’ve been burned many times by having faith in a stronger krone. A lot of people have lost a lot of money, and they’re staying away now.”