DN cuts key policy rate to all-time low

• Danmarks Nationalbank (DN) cuts the CD rate by 15bp to an all-time low minus 0.30%. The rate follows FX intervention purchases.
• DN thus delivers the second 15bp rate cut this week to fend off strong appreciation pressure on the DKK.
• With the ECB getting ready to flood the market with EUR, DN may need to cut the CD rate further into negative territory to curb downward pressure on EUR/DKK.

Danmarks Nationalbank (DN) has just announced a cut in the rate of interest on certificates of deposits (CD rate) by 15bp to minus 0.35%. It left the lending rate unchanged at plus 0.05% and the current account rate and the discount rate unchanged at 0.00%. The unilateral rate cut follows FX intervention purchases.

Since Thursday last week, there has been a strong appreciation pressure on the DKK, which forced DN to cut the CD rate and lending rate by 15bp on Monday – an unprecedented rate cut, as DN normally announces rate changes on a Thursday. The downward pressure on EUR/DKK was triggered by the move from SNB to abandon its floor under EUR/CHF and the subsequent expectation of a large-scale bond purchase programme from the ECB.

The rate cut today and the preceding FX intervention purchases indicate that the action on Monday was not sufficient to curb the appreciation pressure. That DN has cut twice by 15bp in one week, thus lowering the CD rate to an all-time low level, speaks further about the strength of the appreciation pressure on the DKK.

The strong action from DN may ease the recent speculation on the sustainability of the peg but as the ECB has today announced a de facto open-ended bond purchase programme, the downwards pressure on EUR/DKK is likely to prevail as the ECB gets ready to flood the market with EUR. This means that DN may need to conduct further FX intervention purchases and cut the CD rate further into negative territory.