The European Central Bank is likely to lower deposit rate by 10bp to -0.40% during its March meeting. Danmarks Nationalbank (DN) is expected to follow the ECB's rate cut and lower the interest rate on certificates of deposit to -0.75%.

"The 7 January 10bp rate hike normalising the DKK/EUR money market interest rate spread to around the level last seen in 2013 should be sufficient to stabilise EUR/DKK close to the central rate of 7.46038 and we expect EUR/DKK to trade at 7.4550 in 1M-12M", says Danske Bank.

However, it is a close call as at present EUR/DKK trades above the central rate of 7.46038. The DN is expected to carry outs its normal reaction function, meaning that DKK10-20bn of FX intervention outflow will lead to an independent rate rise or a decision to not mirror ECB's move of lowering rates in March, thus narrowing the ECB and DN policy rates spread. If there has been an outflow lower than this level, DN might act.

According to Danske Bank, the DN is unlikely to hike the current account limit of the bank again when the interest rate on certificates of deposit is lowered to -0.75%. This is because the lower net position that has already lowered the amount of excess DKK liquidity banks will be required to deposit at a negative rate of interest.