The World’s Lowest Interest Rate May Soon Be Raised in Denmark

(Bloomberg) -- Denmark and Switzerland have long shared the world record in negative interest rates, at minus 0.75%. But that may be about to change.

Economists at some of the biggest Nordic banks say Denmark, which pegs the krone to the euro, is likely to raise its key rate in the coming months. Not long ago, they thought a cut was more likely, which would have seen Denmark wading into a monetary no-man’s land.

The new forecasts were triggered by the exchange rate. The krone of AAA-rated Denmark is now so weak that the central bank has had to resort to the biggest interventions to support the currency since 2015.

In fact, the krone has traded at its weakest ever against the euro in recent weeks. Danske Bank says the main reason behind the development is that rates in Denmark are now simply “too low” to keep investors happy.

Another development that’s affecting monetary policy in Denmark is the fact that a growing number of commercial banks have recently started passing on negative rates to their retail depositors. That’s helped monetary policy penetrate more layers of the economy and “has further contributed” to a weak krone, Danske says.

Officially, Denmark doesn’t hold scheduled rate meetings but in practice tracks moves by the European Central Bank to keep the krone in a tight band to the euro. And with the ECB now ostensibly on hold, economists expect Danish central bank Governor Lars Rohde to either follow suit or to hike.

Jan Stoerup Nielsen, a senior analyst at Nordea, says that “the likelihood of a hike has increased.”

But, “The ECB still does quantitative easing every month, while the Danish central bank does not, which means excess liquidity in the euro zone will increase and drop in Denmark, pushing up the krone,” Nielsen said.

Forecasting Danish rates has become harder, according to Las Olsen, Danske’s chief economist.

The central bank “could choose to use up more of their reserves, which are still very large, and wait a few months, or say ‘this is enough’ and hike,” Olsen said. “They haven’t given a lot of guidance on how they are thinking, so it could be anytime in the next few months.”

Rasmus Gudum at Handelsbanken says there’s also evidence the central bank may be more willing to live with a weaker krone than has been the case in the past.

“So maybe its tolerance toward interventions has grown too,” Gudum said.

The Danish Peg

Denmark’s central bank has an agreement with the European Central Bank to keep the krone within a 2.25% band around a rate of 7.46038 per euro, although in practice it has been sticking to a much tighter range.

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