Norway is one of the richest countries in all of Europe. Europe’s largest gas supplier. However, it has been stuck in a serious problem for years: its currency, the krona, has not depreciated significantly against the euro. Specifically, It has lost about 15% since January 2022 of its value against the community currency. The ECB’s rate hike has been poison for this currency, which is why the government and the Oslo authorities have been patiently waiting for the Frankfurt cuts to be able to alleviate this problem and prevent inflation from disrupting the plans of its central bank. The problem is that the decisive hour has already arrived and… far from being appreciated, the crown continues to fall.
So far in 2024, the currency has lost about 4.5%, compared to 2.7% since July. This, with the “price of silver” at its highest, 4.5%, where Norges Bank stopped in December 2023. Moreover, the turn towards reductions is not likely to be close. The central bank’s own forecasts speak of three reductions as early as 2025, all of only 25 basis points. The issue of money is something totally recurrent in its decisions, stating that if the downward trend continues, stimulating inflation, this even opens the door to an increase in the price of money.
“Based on our current assessment of the outlook, the policy rate is likely to remain at the current level for some time,” Governor Ida Wolden Bache said, after deciding to hold rates in August. As for the reason for its decision, the central bank itself said that “The crown has depreciated and is weaker than expected“. In this sense, he completed his argument by stating that “the Committee was particularly concerned about the development of the krona exchange rate and its possible implications for inflation”. Consequently, “if there are prospects for the CPI to remain higher for a longer period than expected, interest rates could be (even) higher.” This blow from abroad is all the more problematic for this country since most of its consumer products are imported.
In any case, the Nordic country’s CPI fell significantly, standing at 2.6% in August. after being at 4.7 at the start of the year%. This decline is essential for the country to be able to abandon the very restrictive cycle of financial conditions and, despite the good news, the reality is that there is a real fear that the krona will derail this progress. “Inflation has declined, but Norges Bank must be convinced that 2% will be achieved consistently,” comments Nordea. However, “with a weak Norwegian kroner, there is still a long way to go,” comments analyst Dane Cekov.
The monetary debate completely dominates the discourse in this northern country, which is causing great concern. Former minister and opposition member Sveinung Rotevatn explained in an interview with the Financial Times that the country must solve the “mystery” once and for all of the fall of the crown to historic lows against the euro and the dollar. In short, for this to happen, it would have to be linked to the euro. “The weakness of the crown makes everything more expensive, since we import almost all consumer goods. This generates inflation, which in turn generates high interest rates. The loser is the Norwegian consumer.”
The formula of linking the price of the Nordic currency to the euro, as is the case for example with the Danish krone, has already been presented as an option in the debate to solve this problem, although for the moment its supporters disagree in the minority. This would ensure stability, but, in exchange, the nation would lose its independence and control over its own monetary policy. A debate that had already broken out a year ago in neighbouring Sweden, when the fall of its own currency also caused inflation forecasts to rise.
In any case, the former minister is not the only one advocating this solution. Analysts such as those from the Eika group comment in their latest report that “connection is inevitable” as this is a recurring problem and “this is the clearest solution,” the company told local newspaper Nettavissen.
Why is the Norwegian krone falling?
Whatever the implications of this phenomenon, many analysts wonder why of the movement undertaken by the crown. The difference in rate cycles should influence the currency. In this sense, the unemployment rate remains very low, at 2% and with an economy rebounding since the end of 2023, with GDP growth of 1.4% in the last quarter.
ING also emphasizes that the fundamental factor, Trade balance “is the key factor” something that also does not explain the low price of its currency. “The terms of trade in the euro area and Sweden have deteriorated compared to pre-pandemic levels.” In short, “excluding the 2022 peak, Norway’s current account is at historic highs (17% of GDP).”
In this sense, they highlight a concern about the price of oil, the barrel being at 72 dollars. Prices similar to those observed in September had not been observed in the barrel since the beginning of 2021, when the worst of the pandemic was still in the retina markets and major economies around the world, freezing demand for fuel.
“A large portion of oil sales are settled in U.S. dollars and invested directly abroad”
In this sense, the Norwegian currency is very sensitive to the price of a barrel due to the strong dependence of its economy on this industry. In 2024, the Ministry of Economy of Norway estimates that 24% of its GDP will depend on the energy sector, a trend that has been going on for a long time with a weight always between 10% and 35% since the beginning of the millennium. In any case, Nordea believes that this is not enough “Yes, the price of oil is lower, but that is not even enough to explain the evolution of the Norwegian krone”, comments Ole Hakon in his latest report.
BCA Research experts attribute the current situation to a mix of the two previous factors, including problems with the oil fund mechanism. “Standard economic theory holds that a current account surplus should normally lead to an assessment “The problem, according to experts, is that it is not settled in crowns, but in dollars, “which pushes up the exchange rate.”
In short, “a large part of Oil sales are settled in dollars Americans and invests directly abroad through the oil fund mechanism. Of course, there is always money coming into Norway, but the government also transfers some of this capital abroad, beyond the budget deficit. “But this is not the only factor that has a significant weight because in addition to a current account balance “The “less favorable” profits that companies “reinvest abroad add additional downward pressure on the krona.”
At ING, they also highlight internal factors such as the recent drop in inflationwhich has generated “doubts in the markets about the central bank’s ability to maintain its position for longer.” In any case, they consider the correction to be objective and estimate that it is 13% below its real value, so they expect a medium-term shift towards a revaluation.
