We expect the ECB to cut the refi rate by 10bp on Thursday's meeting, see ECB Preview: Another refi rate cut . First of all, euro-zone inflation declined again and it is now almost certain that inflation in Q1 will be below the ECB's December staff projection. Second, the surge in money-market rates seen at the start of the year is a another concern for the ECB (see p. 10). We would not rule out another cut in the refi rate from the ECB and likely also in the deposit rate later in H1 if we are right in projecting more negative euro inflation surprises.
Yesterday, Danmarks Nationalbank (DN) published January currency-reserve figures which showed that no currency intervention took place in January, despite EUR/DKK has traded above the central rate the past couple of weeks. We expect it will take around DKK10-20bn of intervention before DN raises interest rates independently. Given that no intervention was seen in January, an independent Danish rate hike is not imminent.
An ECB refi rate cut on Thursday should not trigger a DN rate change. DN did not follow the ECB 25bp refinancing rate cut in November and left the lending rate unchanged at the historically low 0.20%. While we think this marks the immediate lower bound for the lending rate, it is nonetheless practically possible for DN to cut the lending rate further (albeit DN has stated it will stay positive). Furthermore, it should be underlined that the important policy rate in Denmark is currently the Certificates of Deposit rate given the "excess liquidity" in Denmark.
If the ECB goes "all in" and cuts the deposit rate as well, then DN would likely reduce the Certificates of Deposit rate accordingly. Given the current spot-rate a Danish rate cut might be marginally lower, but our main case is that an ECB deposit cut will be fully mirrored by DN. See table on page 3
Note that a refi cut from the ECB could in itself potentially help to reduce the relatively large positive carry on long EUR/DKK positions in the FX forward market (see p. 12) and thus serve to alleviate some of the current upward pressure recently seen on EUR/DKK (see p. 7).
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