# Norway inflation and exchange rates

I am looking at Norway's economy, and I'm trying to make sense of some of the data I see. Norway's economy has a very close relationship to crude oil, and in 2014 crude oil had a massive drop. Looking at the inflation, exchange rate (USD/NOK, EUR/NOK) and interest rates, my questions are the following:

1. Is it a correct assumption that the the central bank started decreasing the interest rate, so that the damage to the economy (coming from the low crude oil price) is minimized?

2. Is it correct that a lower interest rate led to a weaker currency and thus higher inflation (2015, but mostly in 2016)?

3. What could be the reason that inflation has dropped significantly recently? (I am asking this since the interest rate has remained the same, though the currency has strengthened a bit).

• The central bank minutes might be a good place to understand the motivation behind policy decisions. – luchonacho Aug 7 '17 at 17:13
• @luchonacho The minutes don't actually say much, the executive board assessment says a few more things, namely that the inflation target is still at 2.5%, and that "The depreciation of the krone associated with the oil price decline contributed to pushing up inflation" however it is not clear how the causality worked here. It's not clear to me why the krone depreciated. Perhaps it's because the bank decreased interest rates, or perhaps it was just speculation that fueled a move after oil prices declined. Perhaps there is no clear 100% answer, but I'd love to hear some opinions from others. – Jason Aug 7 '17 at 20:15

I do not know Norway's economy. BTW, based on what you report, I would first rearrange your points into a more chrono-econo-logical order. Briefly,

3 - Facing the loss of income due to the massive drop in the crude oil price, -- depending on the impacts that this drop may have in term of income redistribution -- Norway's economic agents may have increased their saving rates $\iff$ economic agents consume less. Less demands means weaker upward pressure on prices, which in turn means less inflation.

1 - Facing the increasing masses of savings, Norway's central bank may have started to decrease the interest rate so as to disincentive agents to do so. Indeed, lower interest rates $\iff$ lower rates of return on savings -- if commercial banks propagate this rate change, which is very likely.

2 - Finally, since these lower interest rates tend to attract less foreign investments -- and since, to access to Norway's lending market, those must first buy home country's currency -- this exerts a downward pressure on the value of Norway's currency, which in turn causes a relative price increase of imported goods $\iff$ imported inflation.

To conclude, I would say that your points 1 and 2 are as correct as they are incomplete.