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Price hikes loom in Norway as impact of weak krone grows

Robin-Ivan Capar
Robin-Ivan Capar - [email protected]
Price hikes loom in Norway as impact of weak krone grows
Despite the Norwegian economy's resilience against interest rate hikes and inflation, analysts forecast a weaker economic outlook. Photo by: Norges Bank / Nils S. Aasheim

So far this year, the Norwegian economy has shown high resiliency to interest rate increases and inflation. However, analysts believe that a slowdown is around the corner.

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Although the Norwegian economy has withstood interest rate hikes and inflation better than expected, Nordea predicts a weaker economic development moving forward.

Among other factors, the weak krone exchange rate is singled out as one of the key reasons behind expected adverse developments.

"Price and wage growth has been higher than many had expected. In addition, the krone exchange rate has weakened far more than anyone could have imagined. That helps to keep price growth up," chief economist Kjetil Olsen at Nordea Markets told Norwegian newswire NTB on Tuesday.

While a weak krone exchange rate is good news for exporters, it poses a disadvantage for consumers in the country, as all imports become more expensive. Consequently, the weakened krone exacerbates the ongoing cost-of-living crisis in Norway.

Like several other analysts, Olsen believes the Norwegian Central Bank (Norges Bank) will increase its key rate to 4 percent in autumn.

"Norges Bank wants price inflation to go down, and we, therefore, think the interest rate peak will be higher than many had thought just a little while ago," he said.

Expecting a slowdown

The fact that interest rates are set to rise further will, according to Nordea, affect the economy and cause more people to be out of work.

"We do not predict a crisis, but (we do expect) a clear slowdown in growth," Olsen said.

He pointed out that even if the causes of the problems come from the global economy, inflation must be curbed at home in Norway.

"What started as high price growth as a result of conditions outside the country's borders can take on a domestic life of its own.

"Norges Bank is therefore seeking to cool down the economy enough for inflation to come down again. Even if we wanted it, inflation is unlikely to come down without costs to the economy," he said.

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Home prices to decrease after the summer?

So far, house prices have surprisingly held up despite the increase in mortgage interest rates, according to Nordea's analyses.

This is not the case in, for example, Sweden.

"The changes in the housing loan regulations from the New Year, which mean that more people can borrow more, have probably contributed to the fact that the prices of second-hand homes have developed better than they would otherwise have done.

"However, we think that house prices will start falling somewhat from the summer, partly because we believe that interest rates will continue to rise and partly because unemployment is going to increase somewhat," Olsen said.

You can find more information on how Norway's weak krone affects the property market in The Local's deep dive on the issue.

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The future of the krone exchange rate

As things now stand, most financial analysts expect the Norwegian krone to remain weak in the short term due to a variety of factors, such as Norway's lower key policy interest rate in comparison to the US and Eurozone and the krone's decline aligning with that of the stock market and oil prices, to mention just a few.

Generally speaking, it is difficult to determine when the Norwegian krone's situation might improve and stabilize.

READ MORE: How long will the Norwegian krone remain weak?

Nordea, Danske Bank Norway and Sparebank 1 all agree that the krone will face continued struggles in the short term.

In the mid-to-long-term, however, a significant number of financial experts think the krone could bounce back, with some pointing to energy prices and a build-up in market confidence as potential drivers for this expected recovery.

However, some are more pessimistic. Norway's largest bank – DNB – believes the krone will remain permanently weak and that a currency rate of 12 Norwegian kroner to one euro could potentially become the new standard over the next few years.

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