COPENHAGEN (Reuters) – Denmark’s central bank could cut its key deposit rate to a record low among developed economies on Thursday if the European Central Bank eases policy earlier in the day via a rate cut and other tools, as expected.
The triple-A-rated country was among the first to introduce negative interest rates in 2012 to keep investors from hoarding its safe-haven currency, which is pegged to the euro. It has since seen mortgage rates fall to record lows and its entire government bond yield curve dip into sub-zero territory.
Danish banks last month offered homebuyers 30-year mortgages at a fixed rate of 0.5%, the cheapest ever in Denmark.
The central bank, which usually moves monetary policy in lock-step with the ECB, says negative rates have stabilised the economy and supported economic growth in the wake of the financial crisis that hit in 2008.
A majority of economists expect the ECB to cut its deposit rate on Thursday by 10 basis points to -0.5% to stoke euro zone growth and boost inflation.
“We expect Denmark’s central bank to match the rate cut by ECB one-to-one, but the entire package from ECB could be tough to match,” Sydbank’s chief analyst Soren Kristensen said in a note, referring to other expected easing measures by the euro zone’s central bank.
As a result, Kristensen expects more investors to place money in Danish bonds, which in turn would strengthen the crown in the next couple of months.
Unlike most central banks, Denmark’s does not adjust rates to control inflation. Instead its sole mandate is keep the crown within 2.25% of the parity rate of 7.46038 crowns to the euro.
This year has seen the currency hit its weakest levels since early 2015, although it currently trades at around 7.4603, close to the parity rate.
Kristensen expects the ECB to cut its key rate by 20 basis points to -0.6%, above the market consensus, and the Danish central bank to follow with a reduction in its key rate to -0.85% from -0.65%, where it has held since January 2016.
That would set a new record low among developed economies, taking the Danish benchmark below the -0.75% key rate currently in place in Switzerland.
Analysts at Nordea and Jyske Bank both predict a smaller 10 basis point cut to the Danish deposit rate on Thursday — to match the Swiss level — and a further 10 point reduction following ECB’s next meeting in December.
Danske Bank expects the central bank to cut the deposit rate by 10 basis points, but suggests it could then intervene in foreign exchange markets to steady the crown.
The only way is down: https://fingfx.thomsonreuters.com/gfx/mkt/12/5972/5906/rates.jpg
(Reporting by Nikolaj Skydsgaard; Editing by Catherine Evans)