Denmark policy rate likely to stay below that of ECB into 2018 and beyond

Denmark's growth outlook has improved as evidenced by a major data revision to last year's GDP which now shows 1.6 percent rise last year instead of 1.0 percent reported earlier. Outlook has improved going forward. Indicators for this quarter point to positive consumption growth, and export market developments. However, there has been a worrying decline in consumer and business sentiment.

Despite high volatility during U.S. elections earlier this month, EUR/DKK remained relatively stable. Inflation rose from zero to 0.3 percent inline with expectations, and analysts at Danske bank see it at close to 1 percent in a few months’ time. Also, the Danish CITA money market rates and Cibor fixings have continued to stay low over the last four months.

That said, Denmark earns over one third of its current account surplus from the US. New President-elect Donald Trump's policies will be closely monitored for any possible shift in stance.

If the European Central Bank (ECB) decides to cut its deposit rate further Denmark's National Bank (DNB) may opt to cut to -0.75 percent – a level which is still the lower bound for the key policy rate in Denmark. Danske Bank expects DNB to keep the rate of interest on certificates of deposits unchanged at -0.65 percent in 12M barring need for FX intervention or ECB rate cuts.

"We still believe the significant Danish current account surplus will ensure that the Danish policy rate can stay below that of the ECB for the near future and into 2018 and beyond," notes Danske Bank in a report.

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