Denmark Central Bank Adjusts Tool Box to Help Steer Krone

Denmark’s central bank adjusted its toolbox to help it steer money market rates and ultimately the krone, which is pegged to the euro.

The bank called the changes “technical” in nature, and “not intended to influence the level of the money market rates or the Danish krone,” according to a statement on Thursday. The goal is to “ensure more stable money market rates and thus a more predictable effect on the Danish krone,” it said.

From March 19, Denmark’s benchmark deposit rate will be raised to minus 0.5% from its current minus 0.6%, the bank said. The current account rate will also be set at minus 0.5%, compared with its previous level of zero, while the lending rate will fall to minus 0.35% from plus 0.05%.

Aligning the benchmark and current account rates means banks won’t have to go into the market with as much frequency.

Denmark has lived with negative rates longer than any other country, after first going below zero in mid-2012, and banks have struggled to adapt by trying to place their surplus deposits wherever they’re least exposed to losses. The central bank said on Thursday it was removing a previous limit on the current-account facility, giving banks the option of depositing all surplus holdings there.

No Bank Costs

“Consequently, there is no need on a daily basis to sell or buy certificates of deposit in order to accommodate daily liquidity flows,” it said. “Overall, the adjustments do not give rise to a significant change in the interest cost for the banking sector.”

At Nordea, currencies and rates strategist Andreas Steno Larsen called the move “on paper a rate hike, but effectively a rate cut.”

“This is positive for Danish assets as it will likely lead to a left hand side pressure in EUR/DKK forwards, not least as the market had feared the six-day quarter turn with <100bn DKKs in the system, and accordingly also partly “re-open” DKK fixed income markets for foreign accounts as the FX hedge cheapens. Furthermore, we would argue that banks will face less troubles over turns since the 30.5 bn DKK on the folio/current account are now “in play” again instead of being completely idle cash in the old setup,” Larsen said.

The move comes after the European Central Bank announced it was accelerating its bond-purchase program in a bid to contain rising bond yields. It also follows a strengthening of the krone that economists have speculated might force the central bank to continue buying foreign currency, after February marked its first intervention in roughly a year.

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