We present details on the likely reaction of DN to changes in ECB monetary policy and an overview of the effects on the EUR/DKK forwards.
On Thursday, we expect the ECB to announce an end to sterilisation of the SMP (see Euro Inflation Research No 5: ECB will ease again... and again , 28 February).
In this case, we do not expect any immediate action from Danmarks Nationalbank (DN).
If the ECB stops sterilisation of the SMP, it will increase euro liquidity relative to krone liquidity, which could send EUR/DKK down from the current level above 7.4625. It may further limit the pressure for DN intervention and subsequently rate hikes.
If the ECB stays on hold, the focus will return to the likelihood of DN intervening and raising interest rates unilaterally within the coming months. Note, Februarys currency reserve figures showed that DN did not need to intervene in February to support the krone.
The ECB could also decide to lower interest rates - note we expect the ECB to cut both the refinancing rate and the deposit rate by 10bp in Q2.
If the ECB decides to lower the refinancing rate, we expect DN to stay on hold. The DN equivalent lending rate is currently 0.20%, which is likely to mark the immediate lower bound.
If the ECB decides to lower the deposit rate, we expect DN to lower the equivalent rate on certificates of deposit, which is currently -0.10%.
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