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ECB Expected To Keep Policy Rates Unchanged

ByDanske Markets
Published 12/04/2013, 05:35 AM
Updated 05/14/2017, 06:45 AM
EUR/DKK
0.02%
FTNMX301010
-0.19%

At the meeting next Thursday, we expect the ECB to keep policy rates unchanged.

Danmarks Nationalbank (DN) did not follow the ECB's 25bp refinancing rate cut in November and left the lending rate unchanged at the historical low of 0.20%. We think this marks the immediate lower bound for the lending rate. However, it is practically possible for DN to cut the lending rate further.

Note that on 10 April DN stated, "With low monetary policy interest rates, the room for further reduction of Danmarks Nationalbank's lending rate is limited. The lending rate will remain positive."

If the ECB lowers the lending rate further, we expect DN to keep the lending rate unchanged.

In the unlikely event that the ECB decides to cut the deposit rate by 25bp, we expect DN to cut the rate on certificates of deposits by 25bp to -0.35%.

If the ECB introduces a new LTRO, DN is unlikely to follow. DN Governor Rohde said in September that DN believes there is liquidity in the financial system and that another infusion of three-year central bank loans will not be offered.

The EUR/DKK is currently stable below but close to the central rate of 7.46038 and DN has not needed to intervene since January. Hence, an independent DN rate hike is not imminent. Note though that currently there is a relatively high negative carry on DKK positions in the FX forward market.

Note that DN announced on 2 December that due to financial normalisation, "the possibility of raising six-month loans will be terminated with effect from July 1, 2014. Already granted loans will run to maturity. At the same time, sector company shares and banks' credit claims will be omitted from the collateral basis."

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