(Bloomberg) --
The central bankers overseeing the economy of western Europe's largest producer of oil and gas are in the “thinking box” to figure out why their currency is so weak.
In oil rich Norway, the Norwegian krone has had a tendency to mirror the price of oil. That relationship helped to rescue the economy when the oil price crash hit Norway with full force in 2014. Since then, the krone has struggled to keep up with climbing oil prices, forcing policy makers to re-think their models.
”Based on experience, we have underestimated the longevity of the weakening,” Norges Bank Deputy Governor Egil Matsen said in an interview on Friday.
Norges Bank has raised its estimate on the currency's equilibrium exchange rate, meaning that it now sees the weakening currency as a structural shift. International investors are reluctant to being invested in “small” currencies such as the krone in periods of heightened risk, the deputy governor said. Country specific factors could also play into the equation, Matsen said.
This week, Norges Bank went against the prediction of most analysts and decided to raise its key interest rate. The beaten down currency was a key driver behind the increase and the sole factor that also kept their rate projections up over the next year amid a global slowdown and sinking international rates.
The deputy governor said that signaling a weaker currency was no “tactical tool,” and that it was based on the bank's best professional estimate.
To contact the reporter on this story: Sveinung Sleire in Oslo at ssleire1@bloomberg.net
To contact the editor responsible for this story: Jonas Bergman at jbergman@bloomberg.net
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