Denmark Moves to Ease Banks’ Pain as Krone Battle Takes TollFrances Schwartzkopff and Peter Levring
Denmark’s central bank raised limits on overnight accounts fourfold, easing the pressure from negative rates on banks amid a two-month battle to defend the krone’s peg to the euro.
The central bank increased the total amount lenders may hold in current accounts to 145 billion kroner ($21 billion) from 37 billion kroner, it said in a statement today. The Copenhagen-based bank cited high levels of deposits, on which banks are charged 0.75 percent after rates were cut to negative to deter inflows. The current account rate is zero.
The deposits “have increased considerably as a consequence of Danmarks Nationalbank’s purchase of foreign exchange in the market and the suspension of government bond issuance,” the bank said.
The amount lenders hold in deposits has more than tripled since January after Switzerland’s central bank lifted the franc’s peg to the euro, sparking bets on that Denmark would be forced to do the same. While currency flows suggest speculators have now lost their appetite, pressure on the krone is coming from European Central Bank’s bond purchases driving yields down in the euro area, making Danish assets more appealing.
Central bank Governor Lars Rohde said at a press conference Wednesday that the bank has the sufficient means to defend the peg and has the ability for “unlimited” interventions when there’s pressure on the krone to strengthen.
Rohde’s job is to target 7.46038 kroner per euro inside a
2.25 percent band. In practice, the bank only tolerates swings up to 0.5 percent. The currency traded around 7.4580 in Copenhagen, local time.
Danish investors were primarily responsible for the pressure on the krone in January and February, when the central bank intervened in the currency markets for 275 billion kroner, the bank said today. Two-thirds of the inflow of foreign currencies into the country came from pension funds and other domestic participants, it said.
The bank, which has cut rates four times this year to defend the peg, said today the change to the current account limits, which will be effective March 20, won’t affect the transmission of the negative deposit rate to the money market. Record-low rates are helping to boost the economy, the bank said.
The bank raised its economic growth forecasts for this year and next, also citing a weakened krone. Gross domestic product will expand by 2 percent in 2015 and 2.1 percent in 2016, compared with forecasts of 1.7 percent and 2 percent. The bank said it’s watching the housing market where signs of a new bubble are emerging, urging new tax measures to curb price swings.
The move to boost the current account limit suggests the central bank is cognizant of the pressure banks have been under from negative rates and that rates aren’t likely to be raised in the near term, Rasmus Gudum, a Copenhagen-based economist at Svenska Handelsbanken AB, said by phone.
It shows “that going forward we won’t see the deposit rate going to zero or positive any time soon,” Gudum said.
The central bank may raise the limit again later this year, Jens Pedersen, senior analyst at Danske Bank A/S, said in a note. Today’s move benefits only Denmark’s eight largest lenders, and government payments toward the end of 2015 probably will boost banks’ excess liquidity in the krone by 150 billion kroner, to more than 500 billion kroner, he said.
Forward rates suggest there’s still considerable appetite for the krone. The 12-month contract was trading at about
7.4098, or about 457 points lower than the spot price. That compares with a spread just under zero before January, according to data compiled by Bloomberg.
Rohde has cut rates four times since Jan. 15, when the Swiss lifted their cap. In a historic bid to deter stem the krone’s appreciation against the euro, Denmark also suspended sales of government bonds. Rohde has pushed foreign currency reserves to a record high of almost 40 percent of gross domestic product.
That has driven up deposit to as much as 356 billion kroner earlier this month, according to central bank data. That compares with about 100 billion kroner a year ago.