Danish central bank barricades itself when the ECB opens the floodgates

The ECB's Governing Council has once again opened the floodgates for monetary easing. This opening was announced by Mario Draghi at the ECB meeting on 22 October when he, prepared the financial markets for further measures at the next meeting on 3 December. A new monetary easing package is expected to include both a deposit rate cut of 10 bp and an extension of the current purchase programme - both in terms of volume and duration.

Even if the ECB chooses to slash its deposit rate in early December, economists do not expect the central bank to follow suit with a CD rate cut in the immediate aftermath. When the central bank lowered its CD rate to 0.75% at the beginning of February, it sent a clear signal to the markets that this was the lower threshold for the CD rate and the subsequent stabilisation of the DKK was therefore ensured solely through currency reserve accumulation.

"We expect the bank to stick with this strategy in the current situation. In other words, if the ECB cuts its deposit rate, the central bank will keep rates unchanged. And if this lower rate spread triggers renewed DKK strengthening versus the EUR, this pressure will be mitigated through currency reserve accumulation", says Nordea Bank.

Even in case of significant pressure for a stronger DKK, we do not expect the bank to wield the interest rate weapon again. In this scenario it is believed that the central bank will start an actual purchase programme  an instrument that has again become available after the central bank in early October resumed issuance of government bonds.

"Given the prospects of further monetary policy easing from the ECB, we have in our new forecast postponed the time of the first Danish rate hike to Q2 2016. However, we still expect it will be possible for the central bank to gradually normalise the CD rate to the level of the ECB over the forecast horizon", added Nordea Bank.