Norway’s unusually weak currency, the krone, strengthened a bit on Monday but remains a problem that’s made many Norwegians feel poorer. The government refuses, though, to set up a so-called “krone commission” that could bind the krone to the euro, and supports Norway’s central bank in keeping interest rates unchanged.
“If we were to set up a commission to study the krone’s exchange rate, we’d be sending a signal to the world to just wait a bit, we’ll change the rate,” Prime Minister Jonas Gahr Støre of the Labour Party said at a party leader debate last week.
Støre went on to hail central bank chief Ida Wolden Bache’s interpretation of the ongoing krone drama. “I heard what the central bank chief said today (when Bache announced that interest rates would remain unchanged, despite all the concern over the weak krone),” Støre said. “She spoke in a very proper manner. I would add that she really was saying ‘don’t mess around with my mandate (which is to keep inflation low and employment high).’ I think that’s wise because we have a krone exchange rate that protects us.”
Bache said that she and her colleagues on Norges Bank’s monetary policy committee had also opted against raising interest rates (which could strengthen the krone) or lowering them, as part of their efforts to bring inflation down to 2 percent. She also stressed that the central bank’s key policy rate was likely to be kept at 4.5 percent “for some time ahead.”
Rates had earlier been raised several times, mostly a quarter-point at a time, and Bache acknowledged the resulting “sharp rise in interest expenses on top of a rise in most prices. “Many people have experienced tighter household budgets,” she said, “but the interest rate increases have contributed to reducing inflation,” calling that “a welcome development.” She noted how Norway’s inflation rate has fallen from as high as 7.5 percent in the fall to 2022 to 2.8 percent last month.
With wages now rising more than prices, Bache seemed confident that “most people will see an improvement in their financial position.” International inflation has also declined while unemployment remains low but “a little higher” than expected in June.
The krone, meanwhile, has weakened mostly against the euro and the US dollar and less against smaller currencies like the Swedish krone. Bache noted that the krone is influenced by the value of major Norwegian industries like oil and salmon, and the difference between Norwegian and foreign market interest rates. The krone appreciates when that differential does, too. “If the Norwegian policy rate had not been increased in recent years, the krone exchange rate would have been weaker,” she said.
Now the US and central banks behind other major currencies may lower interest rates, but it’s the fall in oil prices and the oil industry’s “diminished importance” for the Norwegian economy that may have contributed to weakening the krone. She noted the recent calls for Norges Bank to “do more to strengthen the krone,” also that “some have suggested that the central bank should be given more instruments and should intervene in the foreign exchange market by buying kroner to influence the exchange rate.”
She stressed, however, that “Norges Bank is tasked with keeping inflation low and stable while contributing to keeping employment as high as possible. It is our view that we have sufficient tools to deliver on the mandate we have been given,” the most important of which is the policy rate. She also claimed that “the threshold for intervening in the foreign exchange market (in order to bolster the krone) is very high.” She thinks Norwegians “must accept that the krone exchange rate fluctuates” and may, at times, “move in an undesirable direction.” She seems convinced, though, that the floating exchange rate “offers some clear advantages.”
In other words, as Prime Minister Støre indicated, the central bank doesn’t want or need a commission aimed at keeping the krone strong. While Conservative Party leader Erna Solberg, who hopes to replace Støre next year, supports a krone commission, her main ally the Progress Party doesn’t think it’s needed either. “What Norway needs is a new government that can carry out new policies (aimed at strengthening the economy,” declared Progress leder Sylvi Listhaug.
Many Norwegian analysts and economists have also argued against formation of a krone commission. They agree that higher interest rates have tackled inflation and that it’s been important to keep them high. Norway can use the euro to back its currency, but many prefer to keep it independent. Parties on the left side of Norwegian politics, who currently retain a majority in Parliament, also argue against any “quick fix” for the krone and don’t want to tie it to the euro. Boosting productivity, argue others, could be the best stimulant for the weak krone.
Still others, including former central bank chief Øystein Olsen, think there’s “too much concern” about the weak krone. He warns against any “hasty solutions,” and backs Bache’s decision to keep relying on interest rates to curb inflation and keep Norway’s economy healthy.
“Doing our job of ensuring that inflation returns to the 2 percent target is critical to maintaining the credibility of the inflation target,” Bache said, adding that it’s “important to go the last mile of disinflation. By doing so, we will be able to reap the benefits of our efforts.”
NewsinEnglish.no/Nina Berglund
