We expect the ECB to remain on hold at tomorrow's meeting (see ECB: Preview: Wait and see until June, 5 May).
In this case, the focus is set to remain on the pace of normalisation of the interest rate spread to the eurozone and thus when Danmarks Nationalbank (DN) unilaterally raises rates again. Following the 24 April independent rate hike, the EUR/DKK remains above the central rate. Hence, there is a risk that DN may need to intervene and subsequently raise interest rates again over the coming year.
If the ECB decides to lower the refinancing rate, DN will probably keep the DN equivalent lending rate unchanged at 0.20%, which is likely to mark the immediate lower bound. DN has previously said, '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.'
DN may need to cut the rate on certificates of deposits from the current level of 0.05% correspondingly in response to an ECB refinancing rate cut in order to keep the interest rate spread to the eurozone unchanged, as the EONIA fixing is close to the refinancing rate.
DN could also choose to leave the rate on certificates of deposits unchanged following an ECB refinancing rate cut. However, historically DN has often intervened in the FX market before making an implicit rate change, e.g. not fully tracking an ECB rate change to keep the spread in the money market unchanged.
If the ECB decides to lower the deposit rate, we expect DN to lower the equivalent rate on certificates of deposit by the same .
To Read the Entire Report Please Click on the pdf File Below