Lower growth globally is likely to slow GDP growth slightly in Europe and hence in Denmark. Nevertheless, the recovery is still in place, with above-trend growth and rising employment.
While global developments pose a downside risk to our growth outlook, we also see a risk of the Danish economy beginning to overheat. Inflation was still just 0.5% y/y in September but it is expected to be significantly higher inflation next year.
In September, Danmarks Nationalbank (DN) sold DKK22bn of FX to support the DKK. Since April FX intervention has totalled DKK213bn, leaving the FX reserve at DKK514bn.
"We forecast DN will hike the rate of interest on certificates of deposit (CD rate) by 10bp on 3M and another 10bp on 6M to minus 0.55%. The short-term money market interest rate spread to the euro area has already tightened significantly and reached a more 'normal' level. If the current spread to the euro area in short-term money-market rates stays at the current level, DN might not have to hike the CD rate as much as we have put in our forecast", says Dankse Bank.
