Denmark: Danish independent rate hike has moved closer

After the December ECB meeting we have seen a new currency outflow from Denmark, and we now forecast that over the next three months Danmarks Nationalbank (DN) will hike the Certificates of Deposit (CD) rate by a modest 10bp to -0.65%. An independent rate hike could potentially come as early as today.

Our forecast is still well below market pricing. We still believe that the significant Danish current account surplus will ensure that the Danish policy rate can stay well below that of the ECB for the foreseeable future. Our forecast is based on the view that DN favours a currency reserve close to the size at end-2014. If DN is ready to accept a further drop in the reserve, an independent Danish rate hike would not be imminent.

Denmark did not follow the latest ECB rate cut

Danmarks Nationalbank (DN) did not change its policy rates when the ECB lowered the deposit rate by 10bp at the beginning of December and the policy spread between the Danish Certificates of Deposit was narrowed to 45bp from 55bp previously. DN said that the decision not to mirror the ECB reflected, ‘... the sale of foreign exchange in the market since April 2015’.

The non-move from DN, which indirectly can be seen as an independent Danish ‘rate hike’, and the November foreign exchange reserve data, which showed that the sale of foreign currency slowed to a modest DKK7.1bn, could indicate that the outflow from Denmark has now come to an end after the strong inflow in Q1. The Danish currency reserve stood at DKK483.9bn by the end of November, which is still some DKK40bn above the level of the FX reserve at end-2014.

Furthermore, Denmark continues to run a significant current account surplus, which was recently estimated by the central bank to be 7.4% of GDP in 2016.

Given the significant current account surplus and the strong balances of the Danish economy, we have so far estimated that the Danish central bank could keep the Certificates of Deposit rates at the record low -0.75% throughout 2016.

Size of currency reserve in focus

However, recent developments seem to indicate that the currency outflow has continued in December after the ECB ‘disappointed’ the market at the beginning of December.

The banks’ so-called net position at the central bank has dropped over DKK40bn more than the official liquidity forecast from the central bank would indicate. If this ‘rough’ estimate for FX intervention so far in December is correct, it would indicate that the Danish FX reserve is now more or less at the level seen at end-2014 before the strong inflow in Q1.

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