What is making the Norwegian krone so weak?
The Norwegian krone is at its lowest level against currencies including the euro, pound and dollar for almost three years, with several factors influencing its downtrend.
Since the new year, the value of the Norwegian krone has fallen 7.5 percent, which residents will notice when exchanging it for other currencies or using Norwegian money abroad.
The main consequence of a weak krone is getting less for your money when using it outside of Norway due to its performance against other currencies.
On a macro-level, long-term effects may include higher inflation, interest rates and consumer goods. The reason for this is that imports to Norway when the krone is weak become more expensive, making products pricier.
More expensive products mean higher inflation, and Norway's central bank, Norges Bank, uses the key policy interest rate to try and curb inflation. The key interest rate in Norway is currently 2.75 percent, and analysts predict that the central bank will raise rates above its initial target of three percent to try and bring down inflation.
READ MORE: What does the weakened Norwegian krone mean for you?
There are several factors contributing to the krone's decline in recent weeks and months. For starters, the krone is strongly affected by interest rates in other countries. The key policy rate in Norway is generally lower than in other countries.
The lower key policy rate in Norway, therefore, makes the Norwegian krone less attractive to investors. In the past, the opposite was true, where the country's high-interest rates made the krone a more attractive proposition.
Higher interest rates in the US and Eurozone mean investors are more interested in buying dollars than the Norwegian krone.
Additionally, the krone is being affected by other factors, such as uncertainty in the stock market following the collapse of Silicon Valley Bank. Uncertainty on the market, in turn, affects investors' appetite for risk, which due to some of the factors mentioned, makes the krone even more unattractive.
Furthermore, Norway's economy is based on selling commodities like oil and gas. Therefore, as prices of oil and gas fall, so does the krone (generally).
One factor that compounds all of this is the fact that Norway is subject to a floating exchange rate policy. Essentially, this means that Norges Bank doesn't intervene in the market to try and support the currency.
In contrast, some European countries have their domestic currencies tied to the euro. Norway's Scandinavian neighbour Denmark is an example of this. Here, central banks intervene to ensure that the exchange rate of their domestic currency and the euro stays the same. This is referred to as a fixed exchange policy.
In other cases, comparable European countries to Norway use the euro.
As the krone is a free-floating currency and isn't tied to anything, it essentially means that it is more volatile than other currencies.
"The krone is an exposed currency when it's windy. The market turmoil caused by the bank collapse affects everyone. In such a situation, the krone is more volatile and often more sensitive to uncertainty," Nils Kristian Knudsen recently told financial news publication Dagens Næringsliv (DN).
Moving forward, a forecast from the bank Nordea indicates that the krone may remain weak until the summer.
Chief economist Elisabeth Holvik at Sparebank 1 also believes that the krone will continue to struggle in the short-term.
"There are no trends that point to the krone strengthening again. We are approaching the crisis levels from the pandemic, when the financial market in Norway was close to stopping had it not been for the US central bank creating a scheme for lending dollars to Norges Bank," she told DN.
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Since the new year, the value of the Norwegian krone has fallen 7.5 percent, which residents will notice when exchanging it for other currencies or using Norwegian money abroad.
The main consequence of a weak krone is getting less for your money when using it outside of Norway due to its performance against other currencies.
On a macro-level, long-term effects may include higher inflation, interest rates and consumer goods. The reason for this is that imports to Norway when the krone is weak become more expensive, making products pricier.
More expensive products mean higher inflation, and Norway's central bank, Norges Bank, uses the key policy interest rate to try and curb inflation. The key interest rate in Norway is currently 2.75 percent, and analysts predict that the central bank will raise rates above its initial target of three percent to try and bring down inflation.
READ MORE: What does the weakened Norwegian krone mean for you?
There are several factors contributing to the krone's decline in recent weeks and months. For starters, the krone is strongly affected by interest rates in other countries. The key policy rate in Norway is generally lower than in other countries.
The lower key policy rate in Norway, therefore, makes the Norwegian krone less attractive to investors. In the past, the opposite was true, where the country's high-interest rates made the krone a more attractive proposition.
Higher interest rates in the US and Eurozone mean investors are more interested in buying dollars than the Norwegian krone.
Additionally, the krone is being affected by other factors, such as uncertainty in the stock market following the collapse of Silicon Valley Bank. Uncertainty on the market, in turn, affects investors' appetite for risk, which due to some of the factors mentioned, makes the krone even more unattractive.
Furthermore, Norway's economy is based on selling commodities like oil and gas. Therefore, as prices of oil and gas fall, so does the krone (generally).
One factor that compounds all of this is the fact that Norway is subject to a floating exchange rate policy. Essentially, this means that Norges Bank doesn't intervene in the market to try and support the currency.
In contrast, some European countries have their domestic currencies tied to the euro. Norway's Scandinavian neighbour Denmark is an example of this. Here, central banks intervene to ensure that the exchange rate of their domestic currency and the euro stays the same. This is referred to as a fixed exchange policy.
In other cases, comparable European countries to Norway use the euro.
As the krone is a free-floating currency and isn't tied to anything, it essentially means that it is more volatile than other currencies.
"The krone is an exposed currency when it's windy. The market turmoil caused by the bank collapse affects everyone. In such a situation, the krone is more volatile and often more sensitive to uncertainty," Nils Kristian Knudsen recently told financial news publication Dagens Næringsliv (DN).
Moving forward, a forecast from the bank Nordea indicates that the krone may remain weak until the summer.
Chief economist Elisabeth Holvik at Sparebank 1 also believes that the krone will continue to struggle in the short-term.
"There are no trends that point to the krone strengthening again. We are approaching the crisis levels from the pandemic, when the financial market in Norway was close to stopping had it not been for the US central bank creating a scheme for lending dollars to Norges Bank," she told DN.
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