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Tuesday, May 28, 2024

Weak ‘krone’ didn’t spur rate hike

Norway’s central bank kept interest rates steady on Friday and several economists no longer think they’ll be lowered later this year. Others think the country’s weak currency, meanwhile, is undergoing an identity shift, from being a “petro-krone” to one influenced more by Norway’s financial wealth than its oil.

Norges Bank Governor Ida Wolden Bache and other members of the bank’s monetary policy committee opted against raising or lowering interest rates despite the weak krone. PHOTO: Norges Bank

Norges Bank’s committee on monetary policy and financial stability decided to keep Norway’s policy rate at 4.5 percent, the level set late last year when the committee surprisingly raised it by a quarter point. It’s been kept there since, with hints that the bank may lower it later this year.

With the krone so weak, however, the price of it could even be expected to rise, to make it more attractive. Prospects for that now seem slim. Norges Bank Governor Ida Wolden Bache said that the committee’s “current assessment of the (economic) outlook” suggests interest rates “will likely be kept at today’s level for some time ahead.”

That’s because the current rate of 4.5 percent is viewed as “sufficiently high to return inflation to target,” still set at 2 percent. The committee thinks its monetary policy is having the desired “tightening effect,” inflation is easing and economic growth is low. Business costs have also “increased sharply in recent years,” and newspaper Dagens Næringsliv (DN) reported a big jump in bankruptcies last month, more than 50 percent higher than in April 2023. Analysts think bankruptcies will continue to rise, over a wide spectrum of sectors, after an unusually low bankruptcy rate during and also after the pandemic.

Norway’s krone has weakened even when the price of oil has risen. Some think it’s time to “rethink” what influences its value, and that may no longer be the country’s oil wealth. PHOTO:

Relatively high wage growth (5.2 percent in Norway’s most influential labour pact) and the weak krone are “contributing to keeping inflation elevated,” the committee admitted, but there’s still a lot of economic uncertainty. That’s prompted Bache and her colleagues to wait for more information about economic developments prior to its next meeting (and interest rate decision) before the the summer holidays. She even mentioned that the central bank now interprets its mandate as including employment issues in its decision. Labour union officials viewed that as another “major victory,” reported state broadcaster NRK just after Friday’s meeting.

Few seem to expect any further rate cuts this year, though. Kjetil Olsen, chief economist at Nordea Markets, repeated his doubts this week, suggesting that the 4.5-percent level can be “the new normal.” He told business news service E24 that he thinks “neutral rates” (which don’t exert price- or cost pressure) are now around 4 percent, and predicts two rate cuts next year, not this year. His prediction is similar to that of Elisabeth Holvik, chief economist at Norway’s Sparebank1, who foresees rates “staying higher for longer” with no cuts until next year.

‘Rethinking’ the krone
A professor at NTNU in Trondheim, meanwhile, thinks everyone needs to rethink what influences the value of Norway’s currency. Ragnar Torvik shared his ideas with DN last week, when a US dollar cost just over NOK 11 (compared to just NOK 7-8 in earlier years when the price of Norway’s oil was high and industry prospects strong). On Friday it strengthened a bit, with a dollar costing NOK 10.87 in late afternoon.

“We can quickly go from having a ‘petro-krone’ to having a ‘finance-kroner,'” he told DN, with an eye to Norway’s huge sovereign wealth fund (called the Oil Fund) that’s been fueled by oil revenues invested in shares around the world. Torvik noted that the price of oil no longer has as much of an effect on the krone, strengthening when oil prices rise and weakening when oil prices fall. He thinks development of international stock markets will have a greater effect in the future, because that’s where most of Norway’s wealth now lies.

Professor Ragnar Torvik, shown here presenting a state commission report on the Norwegian tax system. PHOTO: Finansdepartementet/Kenneth Hætta

“Traditional analyses were made when Norway’s oil wealth (calculated as the value of oil and gas still under the seafloor) was bigger than our finance wealth,” he said. “Now our financial wealth (the size of the Oil Fund) is several times greater than the oil fortune.”

Norway’s currently weak krone is also a result of a very strong US dollar, the currency many investors turn to in troubled times like now. If the Oil Fund falls in the event of any stock market crashes, the krone can also weaken.

The bottom line is that Norway remains a wealthy country but no longer has such a strong link to its oil fortune. Economic restructuring for the post-oil age is underway, but slow. Currency strategist Dane Cekov agrees that the krone’s link to oil prices isn’t as strong as it once was, but thinks it will fare better when inflation declines further.

“That can take months, or years,” Cekov told DN. “When we look back on these times 10 years from now, I think we’ll see a turning point for the global economy, interest rates and currency exchange.” Berglund



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