Will Currency Warriors Go From Victory to First EU Rate Hike?

  • Six of Denmark's biggest banks see rate increase by December
  • Move higher would become the first by an EU central bank

Denmark’s central bank has held its deposit rate at minus 0.75 percent since February, when it faced the biggest battle in its history to defend the krone’s peg to the euro.

Governor Lars Rohde declared last week that currency markets are now “normalizing.” He’s scaled back record foreign reserves and given a date for the resumption of bond auctions, which had been suspended since January. The question now is what will happen with interest rates.

Here’s what economists at six of Denmark’s biggest banks say (Spoiler alert: Everyone we asked sees at least one rate hike before the end of the year. But the bigger picture is that Denmark’s benchmark rate will probably be negative through 2017.):

Tore Stramer, chief analyst at Denmark’s biggest mortgage bank, Nykredit, expects a 10 basis-point increase next month:

  • “These extraordinarily low interest rates have overall been good for the Danish economy.”
  • “One unfortunate side effect has been the rapid rise in house prices, where the negative rates added fuel to the fire. But we don’t see a bubble forming at this stage.”

Jacob Graven, chief economist at Sydbank, sees Denmark raising rates twice this year, by 10 to 15 basis points each time:

  • “When the central bank first starts hiking, it may go fairly quickly.”
  • “The normalization process has started and the market expects rate hikes, so if we don’t get them, there will be a reaction in money markets.”

Niels Rønholt, senior economist at Jyske Bank, says Denmark will raise the benchmark deposit rate by a total of 25 basis point by the end of 2015, split over two hikes:

  • “We see currency continuing to flow out of Denmark, which means that a rate increase is on the cards.”
  • Jyske estimates that foreign reserves will have shrunk by as much as $6.2 billion by the end of September, “so we’re getting closer to a normal foreign reserve level.” 

Jes Asmussen, chief economist at Handelsbanken, sees one increase of 10 to 15 basis point in October or November:

  • “The ECB is the big unknown factor as they have signaled they may ease monetary policy, which would mean it wouldn’t be feasible for Denmark to raise rates as fast as might have been planned.”

Jens Nærvig Pedersen, senior analyst at Danske Bank, sees one 10 basis-point hike within the next three months:

  • “The Danish interest rate will have to stay below the ECB’s because Denmark has a strong current-account surplus which is creating permanent upward pressure on the krone.”
  • “The Danish central bank therefore needs to keep its benchmark rate lower to deter too much interest in kroner, also in the long term.”

Jan Størup Nielsen, chief analyst at Nordea, sees Denmark raising by 10 basis points in November or December:

  • “One of the factors to watch out for is how the bond auctions will play out once they are resumed; the central bank probably wants to see the outcome of a couple of them before raising the rate.”
  • “For example, if there are a lot of offshore investors buying at the auctions, that may make the central bank pause a bit.”

For more, read this QuickTake: Currency Wars

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