Last year, the krone weakened to levels never seen before. But the governor of the central bank will not tie the krone to the euro.
Governor of Norges Bank, Ida Wolden Backe, is interviewed in connection with the year 2024. Photo: Cornelius Poppe / NTBPublished:
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E24 meets Central Bank Governor Ida Wolden Bache before the annual report, and pokes at a question that has caused many economists to scratch their heads in recent years.
The weak krone exchange rate.
Several economists have advocated that Norges Bank should take measures to stabilize the krone exchange rate. For example, by tying the krone to the euro, or managing it within a predetermined interval. Today, the exchange rate is free flowing.
In the annual report, Wolden Bache rejects the proposals.
She points out, among other things, that the experience of intervening in the foreign exchange market, as Norges Bank did when the exchange rate was managed according to a separate target, is bad.
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Governor of Norges Bank, Ida Wolden Bache, in connection with the year 2024 Photo: Cornelius / NTB
Defends the floating krone exchange rate
– We believe that we have a good mandate for monetary policy today. A flexible inflation management which also means that we let the krone float, says Wolden Bache to E24.
She says that the krone will sometimes move in an undesirable direction, making the trade-offs in monetary policy more demanding.
– But there are also some clear advantages to having a floating course. We have seen, especially in periods of sharp falls in oil prices, that a floating exchange rate can act as a shock absorber in the event of setbacks and slight structural changes in the economy.
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Norges Bank’s central bank governor, Ida Wolden Bache, is interviewed in connection with the year 2024. Director for monetary policy Ole Christan Bech-Moen is also present. . Photo: Cornelius Poppe / NTB
Wolden Bache also says that the floating krone exchange rate means that Norway is not bound to have exactly the same interest rate as abroad.
– It will be particularly valuable in situations where the Norwegian economy does not fluctuate in step with the economy of the trading partners.
– Within certain limits, with a floating exchange rate, we have room to conduct flexible inflation management, adapt monetary policy to the outlook for the Norwegian economy and contribute to high employment, she says.
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Several economists will peg the krone exchange rate:
Portfolio manager Olav Chen at Storebrand has proposed managing the krone exchange rate within given intervals, as a measure to ensure a more stable currency.
This can be done by the central bank intervening in the krone market, as it did, among other things, when the krone appeared to be in almost free fall at the beginning of the corona crisis in 2020.
Chen fears that high interest rates could break indebted Norwegian households.
LO has also been critical of raising interest rates to bring down inflation. Chief economist Roger Bjørnstad in LO, on the other hand, will not bind the crown. He believes that Norges Bank should rather endure a period of high inflation.
Chief economist Jan Ludvig Andreassen in Eika also has to bind the crown. His proposal is to peg the krone to the euro. Kyrre Knudsen in Sparebank1 SR-Bank has also proposed the same, according to Finansavisen.
Several economists have rejected the need to change the monetary policy regime.
Since 2001, Norway has managed the interest rate based on the level of inflation, with a floating krone exchange rate. In the past there have been periods both with floating exchange rates and various forms of fixed rates. The monetary policy regimes have changed at regular intervals, and have rarely lasted more than 20–30 years.
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Wolden Bache says it is difficult to maintain confidence in a fixed exchange rate regime over time.
– Denmark has managed it for over 40 years, but it is one of the few countries that has managed it. The central banks can easily find themselves in a gambling situation with the players in the foreign exchange market.
She also highlights this in the annual report.
– This means that the market will test how far the central bank is willing to go to maintain the fixed exchange rate. There have been historical examples of them doing that.
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– We have one instrument in monetary policy. It is the key interest rate. This is the instrument we will use in the future as well.
Wolden Bache also says that the research done in the area indicates that intervention in the foreign exchange market only has short-term and small effects on the exchange rate.
– The threshold for us to intervene is very high, she says.
Big krone fall
Last year, one euro cost an average of NOK 11.42, according to Norges Bank. The krone was 13 percent weaker against the euro than the previous year and 46 percent weaker than ten years ago.
One dollar cost an average of NOK 10.56 last year. The krone was 10 percent weaker against the dollar than the previous year and 80 percent weaker than ten years ago.
Just a year ago, economists believed that the interest rate would peak at around three percent. Instead, Norges Bank continued to raise the interest rate, and it is now up to 4.5 percent.
A key reason is the exceptionally weak krone, which makes foreign goods much more expensive.
– A currency shock, said Dane Cekov in Nordea to E24 in December.
– When we predicted an interest rate peak of 3 per cent a year ago, we did not imagine that the euro would end up at around NOK 12 now, he said.
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