Krone ‘Out of Favor’ May Aid Norway With Rate Rises

Norway's Central Bank Governor Svein Gjedrem
Svein Gjedrem, governor of Norway's Central Bank. Photographer: Heidi Wideroe/Bloomberg

Norway’s central bank may be able to take advantage of a 5 percent krone loss against the euro since a May high and resume interest rate increases without hurting exporters, Deutsche Bank AG said.

“The Norwegian krone seems to have gone out of favor with foreign investors because of the Norges Bank not hiking rates,” said Henrik Gullberg, a London-based currency strategist at the world’s biggest foreign exchange trader, in a phone interview. “The fact that there is no real sign of a rapid appreciation in the krone provides the bank with a good opportunity to edge up rates very gradually.”

Oslo-based Norges Bank, which last October became the first in Europe to reverse crisis easing as Norway’s oil wealth helped propel the economy out of recession, last raised the overnight deposit rate on May 5, bringing it to 2 percent. A month later, policy makers said they needed to push back tightening plans as global “turmoil” threatened to hurt exports. That followed an 11 percent surge in the krone versus the euro from a December low through a May peak.

Though economists at the Nordic region’s biggest bank, Nordea Bank AB, say policy makers will need to wait until May to resume tightening, Gullberg says they may raise rates in three months.

“There is no reason for them to stop their policy normalization process,” he said. The bank’s next quarter-point rate increase may come as early as January, though it may opt to wait as long as March, Gullberg said. Current Governor Svein Gjedrem is scheduled to retire at the end of this year.

Government Signals

Norway’s government is also showing fewer signs of concern that the krone may hurt the country’s export industry, which is home to Europe’s third-biggest aluminum producer Norsk Hydro ASA and oil-platform maker Aker Solutions ASA.

Trade and Industry Minister Trond Giske said he doesn’t think krone appreciation is an “imminent risk,” in an Oct. 6 interview. The krone last week gained 0.1 percent against the euro to 8.1000, according to data available on Bloomberg. That compares with 7.8033 on May 5, when the bank shelved its rate rises. The currency traded down 0.7 percent against the euro at 8.1561 at 3:28 p.m. in Oslo.

The yield on Norway’s three-year government bond jumped 3 basis points to 2.31 percent, the highest since Oct. 5, according to data available on Bloomberg. The yield on the five-year note rose 5 basis points to 2.51 percent, the highest level since Oct. 8.

Norway Vs Sweden

The krone has slipped as the Riksbank, the central bank in neighboring Sweden, signals it is committed to raising rates. Norway’s krone lost about 8 percent against Sweden’s krona since Norges Bank shelved tightening plans in May. In that period, the Riksbank raised its repo rate twice and has signaled it will increase the benchmark again this quarter. That’s put the two currencies on divergent paths.

While the krone and krona in the past “tended to behave quite the same way as they tend to be very sensitive to the global growth cycle,” said David Deddouche, a Paris-based foreign exchange strategist at Societe Generale SA, in a phone interview. “Now it is more of an interest-rate story that is driving both. You have a very hawkish central bank in Sweden and a very cautious central bank in Norway.”

The Riksbank has lifted borrowing costs twice since July, bringing the benchmark to 0.75 percent, as policy makers steer Scandinavia’s largest economy through a recovery that will see output expand 4.8 percent this year, the government estimates.


“If you get rates to levels that are more normal then obviously you have some ammunition when and if things take a turn for the worse again,” Gullberg said. “That is one of the reasons the Riksbank is now raising rates.”

In the first nine months of the year, Norway sent 11 percent of its total exports to Sweden. Sixty-one percent went to the European Union and 17 percent went to Asia, according to Statistics Norway.

“There is sufficient demand in some of Norway’s key export markets such as Sweden, Germany and Asia,” Gullberg said. “There is a good case, not just for Norway but for economies which have been less affected by the global turmoil, that they should take this window of opportunity and start normalizing policy.”

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