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DKK: Interest rate increase

Fri, May 16 2008, 12:13 GMT
by John Hydeskov

Danske Bank A/S

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• • Danmarks Nationalbank (DN) has with effect from 16 May decided to raise the lending rate and the interest rate for certificates of deposits to 4.35% from 4.25%. The discount rate and the interest rate on banks' current accounts with DN remain unchanged at 4.0 per cent.

• • This interest hike comes as a surprise to the market. As we wrote on 6 May: "We expect DN to tolerate continued intervention in the coming months before resolving to unilateral rate hikes". We believe that this has been the common perception in the market. As far as we know, no one had explicitly expected the DN hike.

• • Last time DN raised interest rates was in February 2006 – also by 10bp – following the TDC sale. At that point, the cumulated intervention amounted to around DKK 34bn.

• • The DKK has recently been under moderate stress and drifted slightly weaker against the EUR. The current pressure on DKK reflects a misalignment in the Danish and euro-area money markets, resulting in positive carry on EUR/DKK. In addition, the Carlsberg purchase of Scottish & Newcastle may have had some negative effect on the DKK, although it is unclear how much of the acquisition has had an immediate DKK effect.

• • The market reaction has so far been relatively muted, with EUR/DKK trading slightly downwards from around 7.4628 to 7.4610, ie, still lingering above the central parity of 7.46038.

• • DN net bought DKK 7.8bn in April to keep EUR/DKK stable. The amount was larger than widely expected. April's intervention was the first to buy DKK since December 2007 (DKK 11.9bn). DN sold DKK worth DKK 8.0bn in Q1. We believe that DN also has intervened in May to support the DKK. EUR/DKK suddenly stopped climbing around the 7.4630-mark while positive carry on EUR/DKK remained. It is, however, still too early to say how large this support has been.

• • We regard the step taken by DN to be pre-emptive. But until money markets normalise, upward pressure on EUR/DKK is likely to be sustained, and today's relatively small hike might be insufficient. We think the DN will be ready to raise rates further if the pressure on DKK remains. Accordingly, vigilance on the DN around Friday 10.00CET is advised.

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Published on  Fri, May 16 2008, 12:18 GMT