Norwegian Krone Surges on Surprise Norges Bank Hike

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The Norwegian Krone surged against the Pound, Euro, Dollar and other G10 peers after Norges Bank unexpectedly raised interest rates by 25bps to 4.5%.

The Pound to Krone exchange rate dropped by over 1.5% to hit 13.38 after Norges Bank defied the market consensus to hold rates unchanged and signalled it would raise interest rates again if the incoming data required.

The Euro to Krone rate dropped 2.0% to 11.50, and the Dollar to Krone exchange rate dropped 2.3% to 10.52.

Norges Bank Governor Ida Wolden Bache said the move was necessary as inflation remained too high, and this hike would serve as insurance that it would come down sustainably.

But she is also clearly unhappy with the weakness in the Krone, which has boosted imported inflationary pressures.

"The Krone has depreciated considerably and is now markedly weaker than we projected in September. We do not have a policy target for the krone exchange rate, but the movement in the krone is of concern to us because a weaker krone means higher imported goods inflation," said Bache. "The krone depreciation could make it more challenging to bring down inflation."

"In our view, Norges Bank has emphasised that inflation is still high, and that the NOK has weakened. Furthermore, high wage growth, actual and forecast, may contribute to sustain a high inflation level compared to the inflation target. The rate hike today will contribute to increase rate differentials and support the NOK, and will thus contribute to curb the inflation risk," says Kyrre Aamdal, an economist at DNB.

Above: GBPNOK (top) and EURNOK at 30-minute intervals. Track NOK with your own custom rate alerts. Set Up Here.

"Risks of higher imported inflation stemming from recent NOK weakness led the Bank to upgrade its forecasts for price growth, and policymakers to deliver on their promise of a final rate hike heading into Christmas," says Simon Harvey, Head of FX Analysis at Monex Europe.

Monex now anticipates a prolonged hold in Norwegian interest rates, in line with new guidance from the Norges Bank, with cuts unlikely to take place until the second half of next year.

"With the likely timing of rate cuts being brought forward for other DM central banks, especially at the Fed and the ECB, rate differentials should prove supportive for the krone into next year too, suggesting that early 2024 should see a strong krone recovery," says Harvey.