DN cuts by another 25bp

• DN has announced a 25bp cut in the CD rate to -0.75%, which brings it on par with the Swiss National Bank (SNB) key policy rate.

• Furthermore, DN has amended the usual press release with additional comments about the fixed exchange rate policy.

• This underscores that DN is strongly committed to maintaining the fixed exchange rate policy but also hints that more emphasis may be put on FX intervention purchases going forward.

• We expect DN to cap EUR/DKK downside at 7.4440 on a 12M horizon.

Danmarks Nationalbank (DN) has just announced that it is lowering the rate of interest on certificates of deposits by 25bp to -0.75% – the lending rate was left unchanged at 0.05% and the current account rate and the discount rate are also unchanged at 0.00%. The rate cut follows FX intervention purchases.

Since 19 January, DN has lowered the CD rate four times by a total of 70bp, which brings the key policy rate in Denmark on par with the key policy rate of the SNB. Notably, DN amended the press release with the following piece.

‘Following the decision by the Swiss National Bank to discontinue the minimum exchange rate and the decision by the European Central Bank to launch an expanded asset purchase programme, there has been a considerable inflow of foreign currency. The traditional monetary policy instruments of the fixed exchange rate policy are interventions in the foreign exchange market and influencing the interest rate spread relative to the euro area. Danmarks Nationalbank’s interventions in the foreign exchange market amounted to DKK106.3bn in January and the rate on certificates of deposit has been lowered several times. Additionally, the Ministry of Finance has decided to suspend the issuance of domestic and foreign bonds until further notice, based on the recommendation of Danmarks Nationalbank. These measures have been taken with the intention to inhibit the inflow of foreign exchange.

“The fixed exchange rate policy is an indispensable element of economic policy in Denmark – and has been so since 1982. Danmarks Nationalbank has the necessary instruments to defend the fixed exchange rate policy for as long as it takes”, says Lars Rohde.

Lars Rohde continues: “There is no upper limit to the size of the foreign exchange reserve. The sole purpose of the monetary policy instruments is maintaining a stable krone exchange rate against the euro. The revenue of Danmarks Nationalbank is positively affected by the increase of the foreign exchange reserves.’

In our view, the larger rate cut and change in statement indicate that DN is strongly committed to safeguarding the fixed exchange rate policy. The amended text may further be a signal that it will put more emphasis on FX intervention purchases than on rate cuts going forward – we note that DN mentions there is no upper limit for the size of the FX reserve but makes no reference to interest rates. This does not imply that further rate cuts are not a possibility and the market may thus price further rate cuts with some probability.

TheEuropean Central Bank (ECB) has yet to initiate its government bond purchase programme and we thus expect the pressure on EUR/DKK to be on the downside. We expect DN to cap EUR/DKK at 7.4440 on a 12M horizon.