What About Danish Interest Rate Policy?
December 3, 2008
Danish monetary policy is subordinated to the goal of stabilizing the krone against the euro. Danish voters opted out of participating in the common currency, and the economy is paying a price for that independence. Ordinarily, Danish interest rate policy moves in lock-step with whatever the ECB does. But pressure on the krone and depleted reserves caused the Danmarks Nationalbank to bump up its lending rate independently by 10 basis points last May. Then after matching the ECB’s July hike of 25 bps in July, another 40 bps of tightening was done on October 7th, and Denmark did not participate in the coordinated rate cut of October 8th when the ECB reduced its benchmark by 50 bps. Instead, the Danish lending rate was nudged up by a further 50 bps to 5.5% on October 24th, hitting a peak level of 5.5%, 115 basis points above its level in early May. Over that same period, the ECB rate fell by a net 25 bps, so the Danish-Euroland rate spread widened by 140 bps. That was enough to enable Denmark’s central bank to revert to form and match the ECB’s cut of 50 basis points on November 6th. The 5.0% level is 1.3 percentage points above on-year CPI inflation and high nominally by global standards.
The krone got as week as 7.4544 per euro earlier today. The 2008 low, by comparison was 7.4654. The krone’s level at present suggests that Denmark will not fully match the ECB’s cut tomorrow, but I expect the Danes to reduce their rates to some degree.
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The Danish Nationalbank got a short-term breazer, but lets see how the numbers out of Denmark will unfold. Denmark has the highest ratio of household debt to disposable income, with 260%, even higher than the UK, US, Ireland or Iceland before the crisis started.
In the month of October, foreign currency reserves of the DnB dropped by 40% (25% officialy but you need to take into account the loans, so 40%). So far, there were so many other news and many investors worldwide haven’t really looked at the Danish situation, but this could quickly change if the situation in Denmark worsens. And who is going to buy now all the DKK (mortagage) and senior bonds – the Euro-based banks and investors certainly NOT. there is no upside for non-DKK based investors holding DKK , only downside!! lots of self-denial within Denmark.
Thanks Nils for this very informative background information.