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What does the weakened Norwegian krone mean for you?

Robin-Ivan Capar
Robin-Ivan Capar - [email protected]
What does the weakened Norwegian krone mean for you?
For the past few months, the Norwegian currency has been relatively weak, whereas the euro, on the other hand, has been quite strong. Photo by: Norges Bank / Press

The Norwegian krone is currently fairly weak, which means Norwegians can get less for their money when buying abroad. Why is that so, and what are the consequences of a weak krone?

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Over the last several months, the value of the Norwegian krone has weakened, while the euro has strengthened.

Norway has a floating exchange rate policy, meaning that its central bank (Norges Bank) does not normally intervene in the market to support the currency.

Some other countries in Europe have their domestic currencies tied to the euro, so their central banks intervene to make sure that the exchange rate of their domestic currency and the euro stay the same. That is called a fixed exchange rate policy.

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Norges Bank recently articulated the benefits – and downsides – of pursuing a floating exchange rate policy.

"A freely floating krone enables us to pursue an inflation target while promoting other aims decided by the Norwegian authorities. With an exchange rate target, we are bound instead to the monetary stance determined by objectives set in other countries.

"Tying ourselves to the mast by binding ourselves to a foreign monetary policy regime can be an objective in and of itself but would entail considerable implications for the appropriate degree of the monetary stance in relation to the economic situation in Norway.

"It is especially true when facing asymmetric shocks, but also when our monetary policy objectives and trade-offs deviate from those of other countries.

"Given the shocks that have hit the economy now, a fixed exchange rate objective would require us to follow foreign interest rates and the trade-offs between inflation and other considerations that others make," Ole Christian Bech-Moen, Executive Director of Monetary Policy at Norges Bank, said in February.

So, with local currencies in countries with a fixed rate tied to the euro, and one euro costing an almost record-high 11 kroner as of early March, Norwegians are getting less bang for their buck abroad.

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The consequences of a weak krone for workers in Norway

From the perspective of the Norwegian economy, there are positive and negative consequences of a weak krone. Generally speaking, the export industry (such as the seafood sector) benefits from getting more money for sales abroad. A weaker krone could also lead to increased wage growth as the export industry's revenues grow.

However, if the krone stays at its current low level for a protracted period of time, consumers in Norway will start to feel the effects – mainly through the increase in prices.

A large majority of consumer items (such as, for example, electronics) bought in Norway come from abroad, meaning that they are often paid for in euros or dollars, as Norwegian Broadcasting's (NRK) economy commentator Cecilie Langum Becker recently pointed out. The weakening krone could thus lead to reduced purchasing power.

Should the currency markets believe that Norway is hesitant to tighten interest rates further to curb inflation, the krone exchange rate may further weaken. Therefore, many Norwegian financial analysts think the central bank will continue raising its interest rate.

In February, Norges Bank's Ole Christian Bech-Moen explained how Norway's central bank acted to curb inflation in 2022 – and where its current priorities lie.

"The primary task of central banks is to ensure price stability. Persistently high inflation is costly to society because, among other reasons, it leads to uncertainty about the value of money and makes economic planning difficult. Through 2022, the pace of policy rate hikes in Norway and other countries quickened to restrain the rise in inflation and reduce the risk of inflation becoming entrenched at a high level.

"The Central Bank Act and the Regulation on Monetary Policy require Norges Bank to maintain monetary stability in the form of low and stable inflation. Monetary policy is to be forward-looking and flexible so that it can also contribute to high and stable output and employment and to countering the build-up of financial imbalances," he noted.

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What can you do to mitigate the downsides?

While it seems that the circumstances negatively affecting the value of the Norwegian krone could be here to stay (at least until the summer), there are some things consumers can do to try and safeguard their personal finances – especially if they plan to make purchases in another currency or travel within the eurozone.

First off, if you can, try to use a credit card with no foreign transaction fees if you need to make purchases in another currency.

Secondly, keeping some cash in local currency is wise if you're travelling to another country. This is particularly useful if you're making minor purchases and want to avoid unfavourable exchange rates abroad.

Last but not least, take the time to compare exchange rates from different banks and foreign exchange providers to find the best rate ahead of a trip – or use an account from another country, in a different currency (only if that currency is in better shape) while the krone is weak.

Some of the key factors affecting the Norwegian krone

Nordea Markets expects the krone to stay weak all the way to the summer months. As the exchange rate is affected by numerous – often related – factors, it's hard to pinpoint any individual driver as the key contributor to the current rate. But there are some factors that have an impact.

The European Central Bank (ECB) has implemented multiple interest rate hikes in the last year, and this policy – mainly aimed at reining in inflation – is likely to continue.

As capital tends to flow to currencies in countries where there is a higher interest rate on money, interest rate increases that surpass the rate of Norway's central bank will likely contribute to a negative effect on the krone exchange rate.

If fewer people want to buy Norwegian krone, the currency will become even cheaper.

Right now, the market expects an interest rate peak of 3.75 percent in Norway, four percent in Europe, and 5.5 percent in the United States.

According to currency strategist Dane Cekov at Nordea Markets, if the market believed that Norges Bank would stop raising interest rates at 3.25 per cent, the krone would be even weaker now.

Furthermore, as a small currency, the Norwegian krone is considered a risky investment compared to the major currencies (such as the US dollar) – especially in times of uncertainty such as these. This perception also negatively affects the krone, making it less valuable. Another factor contributing to the current exchange rate is the low oil price.

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