At its meeting on Thursday, Norway’s central bank decided to raise the key interest rate. Monetary officials around central bank chief Ida Voldenbach left the key interest rate at 4.50 percent, a 16-year low. At the same time, they signaled that the key interest rate would remain this high for some time to come.
In recent years, the central bank has been following international interest rate measures like the European Central Bank (ECB) and the US Federal Reserve, but with some delay. This interest rate differential is used in foreign exchange trading: currencies with lower interest rates are sold – and, according to experts, this is a factor of weakness: especially the rise of the dollar weakened the krona this year.
Sovereign wealth funds are not permitted to invest in Norway
It doesn’t help Norway when the world’s largest pension fund, Norway’s sovereign wealth fund, posts record profits. In the first half of the year, an increase of 1.475 trillion crowns (about 125 billion euros) was recorded. This corresponds to a return of 8.6 percent and, as the Norwegian Central Bank announced on Wednesday, the amount of funds rose to 17.7 trillion kroner.
The pension fund is provided from the revenues of state-owned oil and gas companies and is intended to finance the costs of future generations in the Norwegian welfare state. The fund adheres to strict guidelines on ethics, human rights and environmental protection and currently has investments in nearly 9,000 companies. However, he is only allowed to invest abroad – and that turns out to be a sticking point: he cannot support the currency with purchases or stimulate the economy with investments.
Fight against inflation
The central bank’s reason for keeping the key interest rate high is to fight inflation. It was most recently 3.3 percent, well above the two percent target. Inflation is an important issue because it is fueled by a weakening krone: most consumer goods must be imported, but imports are more expensive because of a weak currency.
The problem is that “we’re getting poorer,” said former prime minister and current conservative opposition leader Anna Solberg. Former Environment Minister Sveinung Rotevatn sparked a heated debate with another proposal.
He suggested to the “Aftenposten” newspaper and later to the “Financial Times” that the krone should be linked to the euro. “Options for the future need to be seriously explored,” the Liberal politician said. He drew flak from almost all political sides for breaking the deadlock on moving closer to the euro.
A “mysterious” descent
However, another initiative was welcomed: the establishment of a “Crown Commission” to investigate currency weakness. Central bank decisions alone do not explain the krona’s decline. It’s kind of a “mystery,” Gjetil Olsson, chief economist at Nordea Bank in Norway, told the “Financial Times.” The Norwegian economy is stable and unemployment is not a big problem.
However, the price of oil plays a role: as the country depends on oil and gas exports, the crown is closely linked to the prices of raw materials. The price crash in 2014 sent the currency into its steepest decline. As oil prices returned to normal after the huge spike caused by the Russian invasion of Ukraine, it caused a sharp devaluation in the fall of 2022. However, experts currently do not see any compelling links.
Weak international investment
The uniqueness of the Norwegian economy can be cited as possible reasons: apart from the large part of the oil industry, Norway is a relatively small economy, which offers relatively few opportunities for investors, says the “Financial Times”. This leads to large fluctuations, especially in times of economic uncertainty.
Opposition and business representatives criticize the country’s centre-left government for weakening the economy with new corporate and property taxes. The hike in wealth tax from one-tenth of a percent to 1.1 percent last year caused a lot of excitement, especially for the rich. About 30 millionaires fled the country, mostly to Switzerland.
A plan of action is needed
Economists from Norwegian banks proposed measures to strengthen the economy’s productivity in the summer. Marius Gonsholt Howe and Elisabeth Holvik refer to a plan implemented in the early 1990s in which business and trade unions agreed on measures to combat low wages and unemployment.
The Norwegian edition of The Local news website said the reissue could help the currency. The Norwegian Union’s chief economist, Roger Bjornstad, advocated a switch to green energy.
Tourism benefits greatly
There is a glimmer of hope – fueled by the fragile crown of all: that holidays in Norway will become cheaper as a result, which will attract tourists. Perhaps supporting the trend of travel to cooler countries, Norway set new monthly records for overnight stays by foreign guests in May and June this year, Bloomberg reported, citing Statistics Norway.
For example, there has been enormous growth in guests from China. In absolute numbers, German visitors lead the statistics, followed by the United States, the Netherlands and Sweden.
