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MONEY

Could Norway’s weak krone trigger a shock interest rate hike?

Despite an updated forecast from Norway's central bank stating the key policy rate was likely to remain unchanged for the rest of 2024, some think a weaker-than-expected krone could trigger a surprise rate hike.

Published: 17 July 2024 11:16 CEST
Updated: 23 July 2024 16:00 CEST
Pictured is a jar of coins.
Norway's weak krone has slumped yet again. Pictured is a jar of coins. Photo by Towfiqu barbhuiya on Unsplash

Despite appearing to be on more steady ground in recent times, and some predictions that it could even strengthen in the coming months, Norway’s krone has suffered another slump.

On Wednesday, a euro was trading for 11.77 kroner, making one euro around 50 øre more expensive than in June. A British pound was trading for over 14 kroner, a record low for the krone. A US dollar was worth 10.79 kroner on Wednesday.

“When the krone is as weak as it is now, there is a real risk of interest rate hikes for Norges Bank again,” Nils Kristian Knudsen, a currency strategist at Handelsbanken, told E24.

Knudsen said the krone was weaker than Norges Bank expected it to be in its forecast. In June, the bank announced that it would change its interest rate path and that cuts wouldn’t arrive until early 2025.

The bank has been using interest rates to curb inflation and set a target of 2 percent. The latest figures that the national data agency Statistics Norway released measured annual inflation at 2.6 percent.

READ ALSO: Why Norway’s cost of living crisis is far from over

When the new interest rate path was unveiled, the bank’s governor, Ida Wolden Bache, said the weak krone contributed to inflation.  

“The devaluation of the krone that we have behind us still contributes to keeping price growth up,” she said.

For this reason, if the situation with the krone becomes dire, then the central bank could be forced to raise rates.

However, not all economists agree with Knudsen’s outlook.

Kyrre M. Knudsen, chief economist at Sparebank 1 SR-Bank, said that inflation slowing beyond forecasts was a sign a rate cut could actually arrive this year.

“Inflation fell a lot more than expected. It is so low that there may soon be an interest rate cut this year anyway,” he told E24.

He predicted a first cut to interest rates in December, followed by a further three in 2025.

Still, Kjersti Haugland, chief economist at DNB Markets, said that the krone exchange rate meant that the central bank was unlikely to cut rates before the end of the year.

She said that the lower-than-expected inflation has convinced the market that cuts will arrive before 2025, which has weakened the krone after it was initially boosted by Norway appearing to take a slower path to cuts.

Norway having higher interest rates than other countries, in theory, strengthens the krone as the currency becomes more attractive to investors. Therefore, a slower path to cut rates is attractive to investors. 

“The fact that, due to a lower-than-expected inflation figure, the market is starting to think that Norges Bank can cut interest rates before the end of the year means that the krone is losing some support. We stood out quite a bit since Norges Bank signalled that March (2025) was the most likely time for an interest rate cut,” she said.

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MONEY

How much will energy bills in Norway cost this autumn and winter?

The last few winters in Norway have seen consumers pay steep energy bills despite a government subsidy scheme. So, how are things looking this year?

Published: 26 July 2024 11:17 CEST
How much will energy bills in Norway cost this autumn and winter?

Energy prices in Norway rocketed in the autumn of 2021, so much so that the government was forced to introduce a subsidy scheme for electricity bills.

Since then, a number of factors have kept bills high, such as fluctuating gas prices, low reservoir filling levels, and high gas prices on the continent bleeding into the Norwegian market.

More recently, several reports have suggested that energy prices in Norway are finally on the way down to more manageable levels. Annual inflation figures released by Statistics Norway earlier this month showed that energy prices fell by more than 20 percent between June 2023 and 2024.

Around 90 percent of Norway’s energy is hydropower, and a large inflow to reservoirs increased power production in the second quarter.

Currently, reservoirs in southern Norway are around five percentage points higher than usual for the time of year. However, northern and central Norway, which has had much drier and sunnier weather than the south this summer, has seen the filling level of reservoirs drop 11 percentage points, Olav Botnen, an analyst at Volt Power Analytics, told Norwegian newswire NTB.

Despite this, energy prices will still be lower in Norway’s north and central regions than in the south this winter. Even with the lower reservoir filling levels, prices in the north are expected to be lower than last year.

“Northern and central Norway are likely to get below 30 øre per kilowatt hour (kWh) for the rest of the summer, and around 45 øre per kWh for the coming winter. It will be a little cheaper than last winter, as expectations are now,” Botnen told NTB.

The reason for the lower prices in northern and central Norway this winter, despite lower reservoir levels, is that the region can also rely on wind power to supplement its electricity supplies.

The region also has a much higher power surplus than the south too, meaning it would take a lot for reservoir levels to affect bills.

While northern Norway can look forward to slightly lower bills, southern Norway won’t see too much of a difference compared to last winter.

“In southern Norway, the market expects around 45 øre kWh for the rest of the summer, August to September. For winter, expectations are around 80 øre per kWh. It is quite similar to what was delivered last winter,” Botnen said.

Meanwhile, southwestern Norway will have slightly higher prices for the rest of summer but similar prices to the rest of southern Norway in the winter.

“They are likely to get a price of 55 and 60 øre per kWh for the summer and the same price as the rest of southern Norway for the coming winter,” Bonten said.

One thing which could positively affect prices, according to the energy analyst Gro Klæboe from Volue Insight, is more stable gas prices.

The analyst said that stocks were looking good for winter, which would lower prices on the continent and have a positive knock-on effect for Norway.

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