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The Danish Central Bank hikes rates − again

Fri, Oct 24 2008, 12:57 GMT
by Kasper Kirkegaard, Stefan Mellin, Steen Bocian, John Hydeskov

Danske Bank A/S


Danmarks Nationalbank (DN) decided today (09.00CET) to raise its lending rate from 5.00 % to 5.50%. The discount rate and the interest rate on the banks' current accounts with DN remain unchanged at 4.50%. All interest increases will have from 24 October 2008. The policy spread between Denmark and Euroland is now 175bp – the highest ever recorded.

According to statements from the DN’s press officer, Karsten Biltoft, the DN “has been forced to intervene to support the DKK in the past few days”. EUR/DKK has in fact been stronger than the central parity, 7.46038, but we have to reason to believe that this has been rather expensive for the DN. DN's currency amounted to DKK160.1bn in September. In September, DN intervened for DKK 0.7bn.

On 7 October, DN hiked its lending rate by 40bp to 5.00%. DN cited the reduction of the spread between DN's lending rate and ECB's marginal rate as the main reason behind the rate hike. The central bank said that the interest rate spread recently has been negative, which has led to an FX outflow. It noted further that it had intervened in the FX market to support DKK and said that the intervention had reached a point which led to an increase of the lending rate. Less than 24 hours later, ECB participated in the coordinated rate cut with other major central banks, which brought the policy spread between Denmark and Euroland to 125bp.

EUR/DKK is trading around the central parity after rate hike. Whether or not the rate hike will have its desired impact in the near future will depend upon how the global credit crisis evolves.

Published on  Fri, Oct 24 2008, 13:02 GMT


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