Denmark: Dovish ECB to keep Danish central bank on hold

We now expect Danmarks Nationalbank (DN) to keep all its policy rates unchanged on 12M; hence, keeping the key policy rate at minus 0.75%.
Should additional easing from the ECB lead to renewed downward pressure on EUR/DKK, we expect DN to cap EUR/DKK around 7.4500 using FX intervention purchases.

The European Central Bank (ECB) today signalled a clear willingness to ease monetary policy at its next meeting in December. Therefore, we now expect it to cut its deposit rate by 10bp to minus 0.30% and keep the door open for further cuts. On top of this, we expect it to extend its bond purchase programme beyond September 2016.

We do not expect Danmarks Nationalbank (DN) to mirror the interest rate cut, as the rate of interest on certificates of deposits (CD rate) of minus 0.75%, the current account rate of 0.00% and the lending rate of 0.05% are, in our view, all at the effective lower bound. Therefore, we now forecast DN will keep its policy rates unchanged at the above levels on 12M – previously we forecast DN would hike its CD rate by a total of 20bp on 6M.

Should the additional easing lead to renewed downward pressure on EUR/DKK, we expect DN to respond with FX intervention purchases to cap EUR/DKK around the level of 7.4500. FX intervention would further increase banks’ net positions and support the pass through of the minus 0.75% CD rate to money market rates. The tomorrow/next fixing is currently around minus 0.45% on average over the week, i.e. there is room to cut rates implicitly in Denmark. Furthermore, DN has the option to reduce banks’ current account limits, currently at DKK63bn, i.e. the amount of excess liquidity they can place at the 0.00% current account rate to support further the pass through.

DN used a suspension of government bond issuance as a tool to fend off the strong appreciation pressure on DKK at the beginning of the year. Although DN Governor Lars Rohde recently said it remained a monetary policy tool, the limited deposits on the government’s account mean that DN has limited room to fund a new suspension of government bond issuance given the relatively high public financing need for next year. Therefore, do not expect DN to make further use of this tool.

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