Denmark will have to wait a bit longer before it can set another world record on negative interest rates, according to the Nordic region’s largest bank.
Nordea no longer expects the next Danish central bank rate cut in December. A 10 basis-point reduction, which would bring the benchmark rate to an unprecedented minus 0.85%, is now expected to come in connection with the European Central Bank’s March 12 meeting, Jan Storup Nielsen, the Nordea’s Copenhagen-based economist, said in an interview.
The reason for the delay is the enduring weakness of the krone and the recent increases in bond yields, he said.
Denmark, which uses monetary policy to keep the currency pegged to the euro, already holds the record for the longest stretch of negative rates. It first lowered its deposit rate below zero in 2012, with the key rate now standing at minus 0.75%, matching Switzerland’s benchmark.
The Danish central bank’s most recent cut came in September and it mirrored an earlier move by the ECB. At the time, economists predicted a similar outcome already in December.
Since then, circumstances have changed, according to Nielsen.
For starters, the political uncertainty stemming from the U.S.-China trade conflict and the risks of a disorderly exit of the U.K. from the European Union have both receded. That has in turn pushed up rates in Denmark, which is seen as a haven for investors during times of trouble (for instance, fixed 30-year mortgages at a record low rate of 0.5%, available until a few weeks ago, are no longer available).
In addition, the krone has continued to trade below parity with the euro, prompting the central bank to intervene on the currency markets for the first time in nine months on Nov. 4.
Going forward, Nielsen expects the krone to strengthen as “surplus liquidity grows in the euro area and falls in Denmark” and for “the sharp increases in bond yields” seen in recent months to end. In addition, the ECB appears to now be in a wait-and-see mode under its new head, Christine Lagarde, while global political uncertainty has receded.
“But things could easily change again,” Nielsen said in a telephone interview.