Norway’s double interest rate hike provides boost to weak Norwegian krone 

Norway’s key policy rate was hiked from 3.25 to 3.75 percent on Thursday by the central bank, Norges Bank. 

The bank said that it was using the double interest rate rise to try and curb inflation in the country. 

“If we do not raise the interest rate, prices and wages can continue to rise rapidly, and inflation will take hold. Then it can be more expensive to bring price inflation down again,” central bank governor Ida Wolden Bache said.

Key policy rate increases are also a tonic for Norway’s weak krone. The krone has been down significantly to other major currencies like the euro, dollar and pound since the turn of the year. 

The weak krone itself also drives inflation. For that reason, a weaker-than-forecast krone played some part in the central bank raising the key policy rate. 

“A weaker krone than forecast probably means that imported price growth will be higher than we envisioned in March,” Bache said. 

One of the factors influencing the weak krone is the fact that interest rates have been lower in Norway than in other countries. The double interest rate raise will therefore provide a boost to the krone. 

“This helps the krone. An important reason why it is so weak is that Norges Bank has lagged behind other central banks (in raising interest rates), but now the distance is closing. Then the krone gets a little less headwind,” currency strategist at Nordea, Dane Cekov, told business and financial news site E24. 

Following the decision to increase the key policy rate, the newspaper Dagens Næringsliv reported that the krone has increased in strength against the euro by around 13-14 øre. This meant that a euro costs 11.56 kroner. 

Prior to the rise, experts predicted an interest rate increase of just 0.25 percentage points would lead to the euro costing more than 12 kroner. 

Similarly, the krone strengthened by 16 øre to the dollar, with a dollar costing 10.48 kroner on Thursday morning. 

The hike also means Norges Bank has implemented a higher key policy rate than other central banks. Last week, the European Central Bank raised its key policy rate to 3.5 percent. Sweden also has a key policy rate of 3.5 percent. However, the key interest rate in the United States is currently 5-5.25 percent. 

“We will get a stronger krone against the background of a more hawkish central bank,” Nils Kristian Knudsen, currency strategist at Handelsbanken, told E24. 

Chief economist at DNB Markets, Kjersti Haugland, told Norwegian public broadcaster NRK that the bank would need to continue raising rates in order to strengthen the krone further. 

“When the krone exchange rate weakens in this way, imports become more expensive. Then the price pressure will remain high for much longer. Now Norges Bank really has to rush to raise the interest rate a few notches further, so the krone exchange rate strengthens,” she said.