Denmark set for zero-rates policy

Today’s cut in interest rates by Danmarks Nationalbank puts the country on track for an effective zero-rates policy, according to commentary from Danske Bank’s Danske Markets analysts.

The central bank announced yesterday that it would cut its rate on certificates of deposit and current accounts by 0.1%, while leaving the discount rate unchanged. The changes come into effect today, 25 May.

The announcement came after the bank was forced to intervene in currency markets following a surge of interest in buying the DKK as a safe haven amidst the ongoing eurozone sovereign debt crisis.

Rates as of 25 May 2012 %
 Lending rate  0.6
 Certificates of deposit  0.2
 Current account  0.15
 Discount rate  0.75
Source: Danmarks Nationalbank  

The demand for DKK comes despite signs that the domestic economy is struggling.

“The crisis still has the Danish economy in its grip. After decent economic growth in Q2, GDP fell in both Q3 and Q4 last year. While the decline was minimal, it nevertheless underscores just how fragile the Danish economy is,” Danske Markets wrote in a note on the Nordic economies in April.

Arne Lohmann Rasmussen, chief analyst and head of Rates, FX & Commodities Strategy at Danske Markets said that with expectations the crisis will continue through the summer, the latest actions of the central bank show that it is not “sitting on its hands”, despite the already low interest rates.

Given the fear of a Greek euro exit, it is likely that currency inflows will continue, Rasmussen added, which raises expectations for further domestic interest rate cuts, on top of the 0.25% cut expected from the ECB on 6 June.

The implication for fixed income investors is that the deposit rate offered by the central bank will fall to zero in coming months, while the lending rate will fall to 0.15% from its current level of 0.6%.

This means that Denmark will for the first time in its history experience zero-interest rates, with a continued risk that the country will experience official negative interest rates.

 

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