The ECB's Governing Council has once again initiated the monetary easing process. The ECB has opted to slash its deposit rate in early December, the central bank is unlikely to follow suit with a CD rate cut in the immediate aftermath, says Nordea Bank.
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.
Analysts 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 be unable to change rates. And if this lower rate spread does not allow renewed DKK to strengthen against the EUR, this pressure will be moderate through currency reserve accumulation.
"In case of significant pressure for a stronger DKK, the bank is unlikely to wield the interest rate weapon again. In this scenario we are more inclined to believe 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", added Nordea Bank.
