Chief economist Jan Ludvig Andreassen in the Eika Group is of the opinion that Norges Bank will play crown roulette with the announced interest rate increases.
Andreassen declared yesterday against Nettavisen that he wants an interest loss from Norges Bank. The central bank has announced up to seven interest rate hikes over the next three years, and the chief economist fears it will give too strong a crown. The krona is now at its strongest level against the euro since the summer of 2019 (see chart below).
In his blog, the chief economist goes even further. Here he uses the headline “Norges Bank at the roulette table”, as if the interest rate policy that the central bank has is far from risky.
Andreassen symbolizes roulette with Dostoevsky’s short story “The Player”, in which the patriarch of a Russian noble family loses all his fortune on holiday in a spa in Europe. The chief economist is of the opinion that Norges Bank places too much emphasis on its own forecasts.
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– I have done a large Norges Bank analysis in a total of five blogs, which I am very happy with. What I am constantly trying to say is that Norges Bank needs to think about the risk scenarios. Creating an interest rate path that adapts to a forecast is not that important.
– It is more important to have an interest rate path that is adapted to the risk picture for the Norwegian economy. And one of the biggest risks for our foreign economy is the krone exchange rate. The current account surplus abroad can be 15 percent of the gross domestic product, Andreassen tells Nettavisen Økonomi.
– And how strongly are you afraid that the crown may be then?
-Now we have an oil-fired and an interest-fired crown. Norges Bank emphasizes that interest rates need to be normalized, but I believe that they should change their exchange rates both this year and next. I think we can already see 9 kroner against the euro at the turn of the year.
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One euro: 8.50
– In the longer term, I see no reason for a weaker krona than the average we had in the 2000s. Then we are on our way to 8.50. The green crown is weaker than the oil crown, and it is very important that we get a weak crown for the green shift.
Andreassen says that a crown of 8.50 will be very heavy for the sector and the green shift. The central bank had already signaled a new interest rate hike in December, which the chief economist believes should be canceled. But then there must be a lot of interest rate signals at the so-called interim meeting in November.
– If Norges Bank raises interest rates in December, I’m afraid we’ll get even more rocket speed on the crown. Norges Bank should now summarize a bit so that we do not get any more interest rate increases, but even then the krone could be back to 9 krona against the euro.
– And what does it mean for Norwegian business?
– It will have two effects: All competing companies, including home development, will mark a penny in the 8s. The second effect is on the consumer price index. We will get deflation (falling prices, editor’s note) in Norway in 2022 and 2023 if the krone stays at 9 krona. This is because core inflation is so low in the first place.
We have not had deflation in Norway since the 1920s, which led to recessions. If prices fall and there are expectations of falling prices, businesses and households will be cautious about consumption and investment. It will intensify a downturn in the economy.
Central to Andreassen’s fears are interest rate differences with Europe, which have not been a problem in the currency market for several years. A significantly higher interest rate in Norway can attract an unwanted amount of interest from foreigners and send the crown to heaven.
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– There was no connection between the interest rate differentials and the krone exchange rate in the years 2016 to 2019. One can get the impression that there is never a connection, but there is.
– For government securities with a maturity of 3-4 years, the interest rate differential is almost 2 percentage points against Germany, and there is a significant interest rate differential. The difference is even higher against Switzerland and Denmark, Andreassen emphasizes.
He points out that the savings rate has increased in all countries. Amounts equivalent to 10,000 billion kroner are “restless on account in Europe” with negative interest rates, as Andreassen states in the blog. He believes that very soon some of these funds can find their way to Norway. Not many central banks are planning interest rate hikes.
The chief economist is of the opinion that things have already gone wrong since the first interest rate hike on September 23rd. The krone has strengthened by 3 per cent against the import-weighted krone index, so there is every reason for Norges Bank to take a break from raising interest rates.
– It is irresponsible with further increases, and Norges Bank must be careful to use the word “normal”. We are a small country in a sea of negative interest rates, we just have to accept that. I think it is obvious that all macroeconomists should understand that with further interest rate increases, we risk a krona well into the eighties, warns Eika Gruppen’s chief economist again.
Norway has a two-part economy. According to Andreassen, a strong krone will not be a problem for the energy industry, as they have margins to resist a strong krone rate. But most of the Norwegian business community is highly exposed to competition, and a too strong krona weakens its competitiveness.
– Then a very strong crown is detrimental to long-term business development and the green shift in the medium term. The “green” crown should be 11 against the euro.
– We live on a life lie and need to become more aware of ourselves. Norwegian macroeconomists are trying to forget what the dilemma is called in monetary policy, Andreassen says.
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– And what is the dilemma about?
– That there are three factors that Norges Bank must take into account: free movement of capital, interest rates and exchange rates. They can only decide to have control over two of them. The latter variable is free and can not be regulated.
– With free capital movements between countries and a controlled interest rate, they must tolerate the last variable, the krone exchange rate, getting out of control.
Andreassen says there are various risks to the Norwegian economy, such as stock market accidents and wars abroad and the krone exchange rate. As for home affairs, we have a new government, but there is not much indication that they will come up with any revolutionaries.
The pay scheme
– The political risk has been reduced. The biggest risk that many central bank executives are afraid of is that the pay settlement will decrease completely. The hardest test next year will be the salary adjustment, and that is a real dilemma, says Andreassen.
He believes that in the middle of the 3rd century we can live with a major settlement, because total settlements will then improve zero in 2021 and 2022 in purchasing power. This year, purchasing power will be reduced, as a result of high inflation driven by electricity prices.
– But there are now supply problems for many goods, which can send prices up?
– It is temporary and will be about anything other than raw materials and energy. Here it is underinvested, the investments are very meager in clean energy compared to the investments in hydrocarbons. We need to have three times as much investment in renewable energy, says Andreassen.
The oil price is to blame
The other chief economist Nettavisen was in contact with pointed out the high oil and gas prices as the main reason for the stronger crown. Andreassen is also of the opinion that in the future we will get both high oil prices and high gas and coal prices.
– There are many factors that influence the crown. But regardless of whether the underlying oil price is 60, 70, or 80 dollars per barrel, we get a very strong business balance. Foreign trade is currently very strong, and with the recent appreciation of the krone it will be even stronger, Andreassen predicts.