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The decline in Norway’s currency has been so dramatic that a former government minister recently resorted to a radical proposal — pegging the krone to the euro.
“I’m open to having the debate at this point, and the quite dramatic weakening of the krone over time means we have to seriously consider our options going forward,” Sveinung Rotevatn, a former environment minister and opposition Liberal party lawmaker, told the Financial Times.
Though the former minister acknowledged fixing the exchange rate came with downsides, these are drastic times for a currency that has been the worst-performing among the top 10 most frequently traded this year.
The krone is now close to record lows against both the US dollar and euro, barring dramatic falls seen during the early days in the pandemic.
The weakness is causing consternation among politicians and businesspeople, with companies forced to raise the price of imports. The central bank, meanwhile, needs to keep borrowing costs high at a time when rate-setters elsewhere are beginning to cut.
“The weakness of the krone makes everything more expensive, since we import practically all consumer goods. This leads to inflation, which again leads to high interest rates. The loser is the Norwegian consumer,” said Rotevatn.
Rotevatn’s calls for a peg, first made in an interview with the Aftenposten newspaper last week, received short shrift from other political parties in Oslo. But there was more support for his proposal of a “krone commission” to look at what has happened to the Norwegian currency, including from Erna Solberg, the former prime minister and main opposition leader.
“It is a problem because we are becoming poorer,” she said at the weekend.
It is not just Norway: neighbouring Sweden, whose krona has also been hard hit in recent years, has seen a renewed debate in recent months about whether it should join the euro to make its currency more stable.
The currency’s weakness will also play a central role in the Norwegian central bank’s meeting on Thursday, with economists expecting it to leave interest rates unchanged on Thursday at 4.5 per cent.
Unlike the European Central Bank, Sweden’s Riksbank and the Swiss National Bank, Norway’s central bank has yet to cut rates in this current cycle.
The persistent weakness of the krone has been treated as unexplained by politicians and business people. The country is both one of the richest in Europe and has one of the lowest unemployment rates, meaning its economic fundamentals are strong.
“It’s been viewed as a mystery, and there isn’t one story on this,” Kjetil Olsen, chief economist in Norway for bank Nordea, said.
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But economists and currency strategists believe there are rational explanations for the krone’s decline.
In currency markets the Norwegian krone was “something of an anomaly, neither animal nor plant”, said Marc Chandler, chief market strategist at Bannockburn Global Forex, with traders lamenting the lack of liquidity to really challenge the main global currencies. For all its wealth, Norway is a small economy, with few assets for foreigners to buy, leading to higher volatility especially at times of market uncertainty.
There are also important geopolitical drivers behind the decline.
The first leg down coincided with a sudden drop in the oil price in 2014, vital for Norway, western Europe’s leading petroleum producer.
The second big shift happened in 2022 when the US Federal Reserve started increasing its main interest level faster than Norway, widening the so-called rate differential closely watched by currency traders.
The Fed has a benchmark target range of between 5.25 and 5.5 per cent, but is expected to cut rates by 50 basis points in September, according to market pricing of interest rate swaps.
Markets predict Norges Bank will make just one rate cut this year, making it “one of the most hawkish of the western central banks” alongside Australia, according to Chandler.
While Norwegian underlying inflation hit a 2-year low in figures released on Friday, it was still 3.3 per cent in July, well above Norges Bank’s target of 2 per cent, and substantially higher than in the US and elsewhere in Europe.
Olsen said the weakness of the currency was decisive for the central bank, with a small chance that it could even raise rates should the krone weaken further.
“It’s natural because it has an impact on inflation down the road as well as wage growth — you need monetary policy to stop this spiral more in Norway than in other countries. We and Norges Bank see an uptick in growth and inflation still high. So there isn’t a sudden need to drop rates,” he added.
For now, analysts counsel Norway’s central bank to stay patient. If it stays on hold while others such as the Fed or ECB cut in the coming months, then its currency could recover. “They have everything to gain by waiting, at least as long as the economy is doing OK,” said Olsen.
Data visualisation by Keith Fray