Negative Rate Risk Returns as Krone Defense Grows

By Christian Wienberg

Photographer: Price Chambers/Bloomberg

Lars Rohde, governor of Denmark's central bank.

Demand for Denmark’s krone has risen so rapidly that the central bank will again need to resort to negative interest rates to defend its peg to the euro, according to the nation’s biggest bank.
Danske Bank A/S sees Governor Lars Rohde cutting the deposit rate by 0.1 percentage point to minus 0.05 percent in the next three months. The central bank only just ended an unprecedented experiment with negative rates in April after 21 months of requiring depositors to pay for the privilege of parking their cash in AAA-rated Denmark.
“The krone has strengthened much faster than
we expected just a few weeks ago,” Morten Helt, a senior analyst at Danske Bank in Copenhagen, said by phone. “Negative rates are now tried-and-tested territory for the Danish central bank, so there won’t be any concerns about crossing that line again.”
In 2012, Denmark fought back a capital influx after investors sought refuge from the debt crisis raging further south. Now, investors piling into kroner are responding to the prospect of a weaker euro as the European Central Bank fights disinflation, Helt said. President Mario Draghi said at the end of last month he will use “all the available instruments needed to ensure price stability.”

ECB Actions

Since then, the krone has appreciated to 7.4492 per euro, its strongest since August 2012. On July 4, 2012 -- one day before Denmark said it was cutting its deposit rate by a quarter of a percentage point to minus 0.2 percent -- the krone traded at 7.4367. The central bank targets a rate of 7.46038, within a 2.25 percent band.
“The recent krone strengthening has moved an independent Danish rate cut closer, but it’s still not our main scenario,” Jan Stoerup Nielsen, a senior analyst at Nordea Bank AB in Copenhagen, said by phone. “But it depends on the actions of the ECB.”
Investors have also started snapping up Danish bonds at a faster pace. At an auction yesterday, the debt office sold 1.75 percent 2025 bonds at 1.18 percent, compared with 1.39 percent just two weeks earlier. It sold 2039 debt with a 4.5 percent coupon at a yield of 1.81 percent, versus 2.37 percent in an April auction.
The Danish central bank doesn’t hold scheduled rate meetings and only adjusts borrowing and lending costs to defend the euro peg. The ECB is due to announce its next rate decision on Sept. 4. Fifty of the 55 economists surveyed by Bloomberg see the bank keeping its benchmark refinancing rate at 0.15 percent, while the rest see a cut to 0.05 percent. Of the 47 economists surveyed on the ECB’s deposit rate, five see a cut to minus 0.2 percent from minus 0.1 percent. The rest predict no change.
“We don’t actually think that the ECB will introduce easing already on Sept. 4, so there may be a small short-term counter-reaction,” Helt said. “But on a three-month horizon we see it coming.”