Krone Gains Provokes Norway Policy Response to Preserve JobsJosiane Kremer and Mikael Holter
Norwegian politicians, central bankers and business leaders have joined forces in a push to weaken the world’s most overvalued currency.
The krone surged to a record this month as crisis-scarred investors sought refuge in AAA rated Norway, which boasts a $700 billion sovereign wealth fund built from its oil resources. The krone is 40 percent overvalued, topping both the Swiss franc and the Australian dollar, according to a gauge compiled by the Organization for Economic Cooperation and Development.
The currency’s strength poses a threat to exporters such as Norsk Hydro ASA and is creating a dilemma for policy makers amid soaring home prices and bulging household debt levels. The “main” cause of Norway’s cost disadvantage stems from the krone’s appreciation, said Kristin Skogen Lund, chief executive officer of the Confederation of Norwegian Enterprise.
The government is trying to adjust fiscal policy to avoid fueling the krone’s strength in an effort to ease pressure on the central bank, Finance Minister Sigbjoern Johnsen said in an interview yesterday. Norges Bank Deputy Governor Jan F. Qvigstad earlier this week indicated that persistent currency strength could prompt the bank to rethink its plans to raise rates as early as March.
“The strong krone deepens the challenge” for Norwegian businesses, Johnsen said. The government will help “ease the burden for the governor of the central bank” by conducting a “tight” fiscal policy, he said.
The minister’s comments are “an attempt of vocal intervention,” London-based Citigroup Inc. analyst Tina Mortensen said in a note to clients today.
Norges Bank kept the bank’s overnight deposit rate unchanged at 1.5 percent for a fifth meeting last month and signaled a possible rate increase may be needed after low borrowing costs fueled household credit growth and sent home prices to records.
Since then, the import-weighted krone index reached 84.7 this month, its strongest level since at least 1999. The index has also appreciated beyond the central bank’s 85.75 forecast for this year. A lower reading indicates a stronger currency.
“If the krone is as strong as it is now for a long time, also until March, that of course has an obvious effect on the interest rate,” Qvigstad said this week after holding a speech at the Norwegian School of Economics in Bergen.
The krone has been the second-worst performing major currency against the euro and the dollar this week, after the Swiss franc, according to Bloomberg data. The currency has weakened 0.7 percent against the euro and 1.1 percent versus the dollar since Monday. It traded at 7.4152 and 5.5619 respectively by 9:43 a.m. in Oslo.
The world’s fourth-richest nation per capita is withstanding a recession in the euro area, and even displaying signs of overheating, amid record investment in Norway’s petroleum industry. House prices have doubled since 2002 and were up an annual 7.7 percent last year, according to the Norwegian Association of Real Estate Agents.
Weak global growth prospects have curtailed the Norwegian central bank’s scope to address overheating risks without fueling krone gains. Central bankers in the euro area, the U.S. and Japan have resorted to additional stimulus, pushing rate increases further out into the future.
“There’s no doubt that the continued appreciation of the krone puts Norges Bank in a difficult position, especially given that the economy is operating above full capacity and risks of financial imbalances are building,” Citigroup’s Mortensen said in a note yesterday.
Nordea Bank AB and DNB ASA cut their interest rate forecasts this week, saying they now predict unchanged rates through 2013. Nordea sees the first rate rise in March 2014, while DNB sees unchanged rates until December 2014. Both banks cite krone strength and new banking regulation as key reasons for the change.
Policy makers have cut the benchmark twice since December 2011 to ease the pain for exporters. Exports fell an annual 9.7 percent in December, according to Statistics Norway.
“The main part of Norway’s cost disadvantage comes from its currency,” Skogen Lund, who heads the country’s biggest employers’ group, NHO, said in an interview. Reining in public spending would be the “most effective” tool to reduce Norway’s cost disadvantage, she said.