Denmark Sees No Deflation Pressure as Economy Gathers Pace

Denmark’s central bank said it sees no threat from deflation as an accelerating rebound has brought the Scandinavian economy back to pre-crisis levels.

Danmarks Nationalbank raised its forecast for gross domestic product growth to 1.5 percent in 2014, 1.8 percent in 2015 and 2.0 percent in 2016, up 0.1 percentage point in all three years, according to a statement today. Inflation will be 0.6 percent this year and accelerate to 1.8 percent in 2016, the Copenhagen-based bank predicted.

“Although wage increases are modest, the low inflation at present is not a sign of deflationary pressures in the Danish economy,” Governor Lars Rohde said in the statement.

The bank, which uses monetary policy to peg the krone to the euro, this month opted not to follow the European Central Bank back into negative territory. Policy makers raised the deposit rate in April, exiting negative rates after almost two years. The ECB this month cut its deposit rate to below zero for the first time as ECB President Mario Draghi unveiled a round of measures to help fight the threat of deflation.

The Danish bank said that excluding a decline in the extraction of raw materials, GDP is back at pre-crisis levels.

“Overall, private sector demand is expected to grow steadily over the coming years, while public sector demand is assumed to rise at a more subdued pace,” the bank said.

Linker Yield

The bank is monitoring the declining unemployment, which it says is at the same level for some professions as when the economy was “overheating” in 2006.

The yield on Denmark’s inflation linked bond due 2023 rose the most in a week to 0.136, according to data compiled by Bloomberg. Unlike nominal bonds, linkers are designed to protect the value of investors’ fixed income from being eroded by inflation.

“Interest rates are close to zero and the housing market has self-reinforcing mechanisms,” Rohde said “Closer monitoring of developments in the housing and labor markets is therefore required.”

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