Thursday, April 24, 2014

Denmark raises rate 15 bps, ends period of negative rates

   Denmark's central bank raised its rate on certificates of deposits by 15 basis points to 0.05 percent, ending its experiment with negative rates since July 2012.
   Danmark's Nationalbank added that its other rates, the lending rate, the discount rate and the current account rate were unchanged at 0.20 percent, 0.0 percent and 0.0 percent, respectively.
    The rate rise follows the central bank's sale of foreign exchange to manage the krone's exchange rate to the euro. Unlike most central banks in advanced economies, the main objective of the Danish central bank is to defend the targeted rate of the krone to the euro of 7.46038 within a tolerance band of 2.25 percent on either side.
    "The short term rates in the euro area which are higher than the equivalent Danish rates have increased. This increase has tended to weaken the Danish krone," the central bank said.
    In addition, the central bank also reduced the current account ceiling of banks and other monetary counterparts to 38.5 billion crowns from 67.4 billion.
    The Danish central bank cut its deposit rate to a negative 0.20 percent in July 2012 following a rate reduction by the European Central Bank, which was fighting to stem the sovereign debt crises. There were serious questions about the survival of the single currency and investors were seeking safe haven in the Danish crown, putting upward pressure on it.
    By introducing a negative rate, banks were in the unusual position of having to pay to deposit their funds with the central bank, which wanted to reduce the attraction of holding Danish assets.
    Since then, the euro zone economy has started to recover and the euro has been strengthening, so much that ECB officials have said a further rise in the euro would trigger some form of monetary easing, such as asset purchases of even cutting the ECB's deposit rate, currently at 0.0 percent.
    Illustrating the waning appeal of Danish assets and the weakening crown, the Nationalbank on Jan. 25, 2013 raised its benchmark lending rate by 10 basis points to 0.30 percent and the deposit rate to minus 0.10 percent.
    The Danish central bank's board of governors do not hold scheduled meetings but normally adjust their rates in response to rate changes by the ECB.
    The Danish deposit rate is now above the ECB's rate, a sign that the central bank is happy to let the crown rise after intervention to support it.
    The crown rose to 7.461 against the euro from 7.466 prior to the central bank's rate rise.
    Last month the Danish central bank cut its forecast for economic growth this year to 1.4 percent from a previous forecast of 1.5 percent but raised the 2015 forecast to 1.7 percent from 1.6 percent. 
    The Danish economy has struggled since the global financial crises, with Gross Domestic Product contracting by 0.4 percent in 2012 but expanding by 0.4 percent in 2013.


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