Norway’s krone is down to most major currencies considerably since the turn of the year. Since the turn of the month, the drop-off has been even sharper.
In immediate terms, this means less value for money when using the currency abroad, and in the longer term may mean higher inflation and interest rates.
READ MORE: What does the weakened Norwegian krone mean for you?
There are a number of reasons for why the Norwegian krone has performed weakly, from Norway having a lower key policy interest rate than the US or the Eurozone, investors taking less risk, the central bank Norges Bank selling kroner and the krone falling with the stock market and oil prices.
Some of the factors are also further compounded by Norway having a floating exchange rate. 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.
READ MORE: What is making the Norwegian krone so weak?
Some of the factors behind the krone being weak also act as hints as to when the currency could begin a recovery. First up is interest rates. Norges Bank is expected to raise the key policy rate above its initial target of three percent due to the weak krone and higher inflation.
Experts predict that the key policy rate could, in fact, be raised to between 3.5 and 3.75 percent. However, this would still leave the key interest rate below the US’s Federal Reserve interest rate, or federal funds rate, which is set at 4.75 percent.
However, raising the key policy rate will help to make the krone a more attractive proposition for investors, with high-interest rates historically contributing to a strong krone. Norway’s next key policy rate announcement is pencilled for March 23rd.
Furthermore, as the financial markets stabilise, so should the Norwegian stock market and the krone. And, if oil and gas prices rise, the krone should follow suit.
Overall It can be hard to pin down when the situation could improve for the Norwegian krone. Nordea Markets expects the krone to stay weak all the way to the summer months. It said that due to the various factors involved, the krone’s recovery may not meet this time frame.
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 the business news outlet DN.
Meanwhile, DNB writes that the krone will remain weak for as long as uncertainty over a potential banking crisis looms over financial markets worldwide.
“We still think the krone can strengthen, but the market turmoil must probably subside first. As long as the risk of a banking crisis is uncomfortably high, it will probably help to limit the possibilities for krone strengthening in the future. But in the short term, we believe that oil prices will rise as the oil market tightens, and we aim for an oil price above 100 dollars a barrel this autumn,” DNB wrote in a report.
Danske Bank Norway believes that the krone will rise in the more longer-term thanks to energy prices.
“So, to summarise why the Norwegian krone is weak today, in the short term, it is due to a weak risk sentiment in 2022 and a falling interest rate differential between Norwegian and international interest rates. In the longer term, however, a secular trend with rising energy prices will gradually strengthen the krone,” it wrote in an analysis.