Denmark raises deposit rate 10 bps to minus 0.65% - Corrected
Denmark's central bank raised its deposit rate by 10 basis points (corrected from 100 points as in previous version of the story) to minus 0.65 percent, while it left its lending and discount rate unchanged, following sale of foreign exchange in the market.
Danmarks Nationalbank had been expected to raise its deposit rate to limit further intervention after heavy purchases in December to limit the decline in the Danish krone against the euro.
In addition to raising its deposit rate, the central bank lowered the current account limits of financial institutions to 32 billion Danish crowns from 63 billion.
"The reduction of the current-account limits is a consequence of the monetary-policy counterparts' reduced need to place liquidity in Danmarks Nationalbank," the central bank said.
The central bank adjusts the current account limits of banks, which allows them to hold certificates of deposits, to ensure that its interest rates can be transmitted to money market rates.
On Dec. 3, the ECB cut its deposit rate by 10 basis points to minus 0.30 percent and extended its quantitative easing program by six months, leading to a rise in the euro's exchange rate as investors had expected even more easing.
The Danish central bank, which was forced into a series of rate cuts in January 2015 following the Swiss National Bank's decision to scrap its cap on the franc's exchange rate, last cut the deposit rate by 25 basis points to minus 0.75 percent on Feb. 5, 2015 to stem an inflow of funds into Denmark.
The main objective of Denmark's Nationalbank is to defend the exchange rate of the crown to the euro as a way to control inflation. It uses interest rates to make it more or less attractive to hold crowns and has a central exchange rate target of 7.46038 crowns to the euro, within a tolerance band of plus/minus 2.25 percent, or between 7.29252 to 7.62824.
Since the ECB's move in December, the Danish central bank has been intervening to keep the crown in its trading range and last month Denmark's foreign exchange reserves fell to 434 billion crowns following intervention of 50 billion crowns to support the crown.
Danmarks Nationalbank issued the following statement:
"Effective from 8 January 2016, Danmarks Nationalbank's interest rate on certificates of deposit is increased by 0.10 percentage point. The lending rate, the discount rate and the current-account rate are unchanged. The interest rate increase follows Danmarks Nationalbank's sale of foreign exchange in the market. The monetary policy rate spread to the euro area is thereby narrowed from -0.45 to -0.35 percentage point.
Effective from 8 January 2016 and following the interest rate increase, the monetary-policy counterparties' current-account limits will be reduced from kr. 63 billion to kr. 32 billion. The reduction of the current-account limits is a consequence of the monetary-policy counterparties' reduced need to place liquidity in Danmarks Nationalbank.
Additional information on the monetary-policy counterparties' current-account deposits can be found on our website, www.nationalbanken.dk, under Rules > Monetary and foreign-exchange policy.
Effective from the above date, Danmarks Nationalbank's interest rates are:
Lending rate: 0.05 per cent
Certificates of deposit: -0.65 per cent
Current-account: 0.00 per cent
Discount rate: 0.00 per cent"