Thursday, November 7, 2013

Denmark maintains rates as banks need to place funds

    Denmark's central bank maintained its key interest rates, despite a rate cut by the European Central Bank (ECB), saying commercial banks have "a large need to place funds" at the central bank.
    The National Bank of Denmark, which aims to keep its currency stable against the euro, normally shadows any ECB rate changes to maintain a rate spread to the euro and hold the crown currency within its fluctuation band of plus/minus 2.25 percent to a central rate of 7.46 crowns per euro.
    The Danish central bank entered unchartered territory in July 2012 when it cut its rates, including the deposit rate by 25 basis points to a negative 0.2 percent, in an attempt to weaken the crown which came under upward pressure as investor sought safe haven outside the euro area's sovereign debt crises.
     In January this year, the central bank then raised its rates after investors started to return to euro zone assets and the crown fell. Rates were raised by 10 basis points, leaving the deposit rate at a negative 0.10 percent and the key lending rate at 0.30 percent.

    In May, following the ECB's first rate cut of the year, the Danish central bank cut its lending rate by 10 basis points to 0.20 percent but left its deposit rate at minus 0.10 percent, just as the ECB maintained its deposit rate at 0.0 percent.
    "In the current liquidity situation in the euro area the money market rates are marginally above the deposit facility which as mentioned is kept unchanged," the Nationalbank said.
    "Since the monetary policy counterparties - the banks - have a large need to place funds at Danmarks Nationalbank, the monetary deposit rates determine the money market rates and the exchange rate. For this reason Danmarks Nationalbank keeps the interest rates unchanged" the bank said.
    The Danish crown tends to trade in a narrow range against the euro but was volatile today, fluctuating between a low of 7.466 euros and and a high of 7.456.
    The Danish economy - which is not a member of the euro zone - is gradually improving, with Gross Domestic Product up by an annual 0.6 percent in the second quarter after four consecutive quarters of contraction.
   In September the central bank cut its 2013 growth forecast to 0.3 percent from 0.5 percent and forecast growth of 1.6 percent in 2014.


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