Negative Rates Drive Denmark to Tighten Fiscal Policyby and
Denmark's government reduces its borrowing need forecasts
Budget deficit estimate for this year lowered to 2% of GDP
Denmark’s government said the loose monetary policy environment underscores the need for budget discipline as it predicted a smaller deficit for 2015 than previously estimated.
The budget shortfall will reach 2 percent of gross domestic product in 2015, compared with an earlier estimate of 3 percent, according to latest economic forecasts published by the Finance Ministry on Thursday.
“Monetary policy is expected to continue to be very expansionary in the coming years, which will support domestic demand,” the ministry said in the document. “All things being equal, this increases the need for a gradual tightening of fiscal policy.”
Finance Minister Claus Hjort Frederiksen said the squeeze will last at least five years as he targets a balanced budget in 2020.
Denmark’s central bank has kept its benchmark deposit rate at minus 0.75 percent since February to defend the krone’s peg to the euro. There are already signs that historically low rates have started to inflate property values, with house prices in November more than 7 percent higher than a year ago, Danske Bank said on Wednesday.
Demand for AAA-rated Danish assets has put pressure on the currency peg since the height of Europe’s debt crisis in 2012, when the central bank first resorted to negative rates. Meanwhile, Danes carry the rich world’s biggest gross debt burdens, at about three times disposable incomes.
The economy will grow 1.4 percent this year, slightly less than the 1.5 percent previously estimated, the ministry said. GDP will expand 1.9 percent in 2016 and 2 percent the following year, it said. House prices will rise 4 percent next year and in 2017, after gaining 6.3 percent in 2015, it said.
Separately, the Danish central bank on Thursday also lowered its 2015 GDP forecast to 1.4 percent. It had previously expected 1.8 percent growth.
In a statement, the central bank said it “maintains its recommendation to gradually adjust fiscal policy –- from currently stimulating activity to having a neutral effect on the economy” and that the tightening signaled by the finance ministry “is appropriate in the current economic environment.”
The finance ministry’s projection of a smaller 2015 budget deficit coincides with a reduced borrowing need. This year’s krone-denominated financing requirement was cut by 14 percent to 114 billion kroner ($17 billion), while next year’s will be 10 percent lower than originally projected.