Sept. 12 (Bloomberg) -- As inflation crawls at its slowest pace since records started in 1967, Denmark’s government says the disinflation is helping Scandinavia’s weakest economy.
“I can’t see at all that the current low level of inflation should pose any risk,” Economy Minister Margrethe Vestager said in an e-mailed response to questions. “On the contrary, we need household budgets not to be eroded by price gains; this has been an issue in the past.”
Denmark has lagged behind neighboring Norway and Sweden in surfacing from the fallout of Europe’s debt crisis. A 20 percent slump in house prices since their 2007 peak wiped out more than a dozen community banks as impairments ate through solvency buffers. Denmark’s inflation rate sank to 0.4 percent in August, from 0.6 percent a month earlier, the statistics office said on Sept. 10. Inflation was 2.5 percent a year ago.
While Denmark emerged from its recession last quarter, the recovery was driven by government spending and an increase in exports. Household spending, which fell in the first three months of the year, stalled in the quarter through June, according to Statistics Danmark.
Nordea Bank AB, Scandinavia’s biggest lender, estimates Denmark’s economy will grow just 0.3 percent this year, compared with 1.3 percent for Sweden and 2 percent for Norway, according to its September economic outlook.
Vestager signaled households should take advantage of record-low inflation to boost spending now before price gains pick up. Much of last month’s slowdown followed cuts in taxes on fatty foods, an effect that won’t last, she said.
“Both here and abroad it would be natural to expect inflation to rise somewhat again,” she said.
Danske Bank A/S, Denmark’s biggest lender, is warning investors not to misinterpret the nation’s price development as something that could lead to the kind of chronic deflation that Japan has suffered.
“Nothing suggests that Denmark is becoming a copy of what Japan was,” Steen Bocian, chief economist at Danske Bank in Copenhagen, said in an interview.
According to Nordea, inflation will accelerate as unprecedented monetary easing drives prices higher, even causing price bubbles. The bank is urging clients to buy inflation-linked debt to hedge against future inflation.
Inflation will accelerate to 1.7 percent next year, compared with 1.1 percent in 2013, according to a Bloomberg survey of 11 economists. Denmark’s central bank doesn’t target inflation and instead uses monetary policy to defend the nation’s currency peg to the euro. The bank has kept its deposit rate below zero since July last year, while its benchmark lending rate is at a record low of 0.2 percent.
Denmark’s 10-year inflation-linked bond rose yesterday as investors including head of bonds at PFA Pension, Poul Kobberup, said there aren’t enough linkers to satisfy demand.
The debt office in Copenhagen, which introduced its first inflation-linked bond last year, targets an outstanding volume of at least 20 billion kroner ($3.6 billion). The office has sold 13.3 billion kroner in the bond to date, according to the central bank’s website. Ove Sten Jensen, head of the office, said yesterday issuance will follow market demand. According to Nordea, that’s likely to pick up.
“It’s easy to see how inflation will materialize from the current monetary policy regimes employed by central banks,” Jan Stoerup Nielsen, an economist at Nordea who’s based in Copenhagen, said in an interview. “We’ll get some bubbles.”
To contact the reporter on this story: Peter Levring in Copenhagen at firstname.lastname@example.org