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Tuesday, May 21, 2024

No change in rates despite weak krone

Norway’s central bank (Norges Bank) decided to keep its key policy rate unchanged at 0.5 percent on Thursday, even though the Norwegian krone has weakened considerably in recent weeks. The weak krone is baffling some local analysts, who can’t understand why it’s lost value as the economy strengthens.

Some financial analysts in Norway can’t understand why the krone has weakened in recent weeks, and it initially weakened a bit more after Norges Bank kept its key interest rate steady at just 0.5 percent on Thursday. PHOTO:

“In general I would say that the krone is surprisingly weak,” Erik Bruce, chief analyst at Nordea Markets, told newspaper Dagens Næringsliv (DN) just before the central bank’s executive board released its latest monetary policy report. “It’s an incomprehensibly weak krone.”

The central bank board, meanwhile, followed up on its conclusion in March that there was a “continued need for an expansionary monetary policy” in Norway. Capacity utilization in the Norwegian economy was below normal and inflation was expected to range between just 1- and 2 percent over the next few years.

At the same time, the bank board repeated that “registered unemployment” has declined and is lower than projected, while consumer prices (adjusted for tax changes and excluding energy products) rose just 1.7 percent in March. “The krone exhange rate has depreciated,” the board added, while expected money market rates for trading partners have fallen.

“The outlook and the balance of risks for the Norwegian economy do not appear to have changed substantially since the March report,” stated Norges Bank Governor Øystein Olsen. “The key policy rate had therefore been kept unchanged.”

Foreign traders may have positioned for a rate reduction
Bruce told DN that he thinks some foreign currency traders may have thought that the central bank would actually cut its key policy rate because of the low inflation rate. That didn’t happen and the krone continued to weaken immediately after the bank board report was released. After trading at around NOK 8.50 to the US dollar just a few days ago, it was trading at NOK 8.61 Wednesday evening and NOK 8.63 Thursday morning. Just 20 minutes after the interest rate announcement was made, one US dollar cost NOK 8.645. One euro cost NOK 9.439, up from NOK 9.15 at the beginning of April.

DN reported that by Wednesday evening, the value of the Norwegian krone had fallen by 2.61 percent against the euro during the past month, and is at its weakest level for the past nine months. During the same period, unemployment rates have steadily fallen and several economic outlooks have claimed that optimism is returning after the oil price collapse in 2014.

DNB Markets pointed this week to reduced political risks, positive economic indicators in Europe and lower oil prices as reasons for the weaker krone. While oil prices have nearly doubled from their low point in January of last year, they have dipped from USD 55-56 a barrel at the beginning to April to USD 50.85 on Wednesday. The lower political risk and better outlook in Europe have also boosted the value of the euro, not least against the krone.

DNB Markets nonetheless believes the weakness of the krone is “exaggerated” given developements in fundamental drivers of the economy in Norway. DNB, like Nordea, expects the krone will strengthen in the months ahead. Exporters and the tourism industry, however, likely hope it won’t. They gain on a weak krone because then Norway’s high prices aren’t as hard to accept for foreign customers and tourists from abroad. Berglund



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