Today, we see the odds slightly in favour of further ECB easing. Our main scenario is a 0.10% cut in the refi rate to 0.15% (see ECB preview - The balance is set to tilt to more easing ).
If the ECB decides to lower the refinancing rate, we do not expect any immediate action from Danmarks Nationalbank (DN). The DN equivalent lending rate is currently 0.20%, which is likely to mark the immediate lower bound. DN has earlier said that, "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 stays on hold, market focus is likely to return to the likelihood of DN intervening and raising interest rates unilaterally during the coming months. However, currency reserve numbers released yesterday showed that DN did not intervene to support the Danish krone last month. Hence, the lack of intervention despite EUR/DKK trading at the highest level since 2006 in March could be an indication that the reaction function of DN has changed under the new governor Lars Rohde (see Research DKK - Vagueness in the reaction function ).
In our view this strongly underlines that an independent Danish rate hike is not imminent and that DN is now more relaxed about EUR/DKK trading slightly above the central rate at 7.46038 than it was just a year ago. Hence, it now seems more and more likely - also given the huge Danish current account surplus - that the negative Danish deposit rate will remain negative throughout 2014, which is very different from the current market pricing. The market expects several independent Danish rate hikes over the coming 12 months.
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%.
On the following slides, we present details on the likely reaction of DN to changes in ECB monetary policy and an overview of the effects on EUR/DKK forwards.
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