Denmark raises rates in lock-step with ECB

Denmark's central bank raised its lending rate on Thursday by 25 basis points to 1.30 percent as expected after the European Central Bank lifted its main rate by the same amount to 1.25 percent. The central bank also raised its certificates of deposit (CD) rate by 25 bps to 0.95 percent and its current account rate by the same amount to 0.85 percent.
Before the announcement, some economists had seen a chance that the Danish central bank would raise the CD rate more steeply than the lending rate in a bid to normalise interest rates. But Governor Nils Bernstein told Reuters in a telephone interview that the bank had no plan to remove the gap which was introduced during the financial crisis.
"We have introduced a margin between the deposit rate and the lending rate to give banks an incentive to lend to each other," Bernstein said. "We have changed all our rates in parallel." "Now there is a margin, and we have not changed that. We have no plans for that," he said.
Bernstein also said that the Danish economy is strong enough to cope with the rate increase and that the bank continues to carry out its mandate based on its fixed exchange-rate policy and not with a view to the macro economy. "We will follow the ECB at the pace at which they must raise rates," Bernstein said on TV2 News.
"Since we are outside the euro, the Danish rate should be slightly higher than the euro rate because we have an independent currency and we have traditionally been slightly above (in interest rates) and will continue to be," Bernstein said. The Nationalbank's policy aims to keep the Danish crown steady within a narrow band to the euro, and holding the gap with eurozone official rates steady serves that purpose, so the move was fully priced in by financial markets. "We do not take the macro economy into consideration since we only look at the fixed exchange-rate policy," Bernstein told Reuters. "But of course one can look at where the macro economy is going, and it is my evaluation that the economy at this point can cope with a 0.25 percentage point rise."
"No one ought to be surprised that the unusually low rate we have seen for a while, was not able to last," Bernstein said. The lending rate had been 1.05 percent since January 2010, and the rate rise was the first in Denmark since October 2008 when the bank hiked to 5.50 percent, the peak of its tightening cycle just as the world slid into financial crisis.