Denmark adjusts rates after ECB increase

The National Bank of Denmark increased interest rates by 50 basis points on March 16 to maintain the krone’s fixed exchange rate against the euro.

The move followed the European Central Bank’s decision on the same day to increase rates by 50bp to 3%. From today (March 17), Denmark’s current account rate is 2.6%, the certificate of deposit rate 2.6%, the lending rate 2.75%, and the discount rate 2.6%.

“Thereby, the monetary policy spread vis-á-vis the euro area will remain unchanged,” the NBD said.

This is the sixth interest rate increase since the summer of 2022, but on two occasions the NBD increased rates by less than the ECB to offset upward pressures on the krone.

On March 15, the central bank warned inflation will remain high in 2023. Consumer price index (CPI) inflation increased year on year from 1.9% in 2021 to 7.7% in 2022. This is way over the ECB’s 2% target that, through the krone’s currency peg, is effectively Denmark’s monetary policy framework.

Although the central bank forecasts inflation will fall “markedly” in 2023, it expects it to decline to 4%, still double the reference target. Also, as a result of higher interest rates, economic growth will slow down. The central bank forecasts real GDP growth of 0.9% of GDP in 2023, down from 3.6% in 2022.

Weaker inflation is forecast to be the consequence of falling energy prices. However, “higher wages will cause inflation to remain high”, the central bank added in its latest economic assessment.

The report says wages in manufacturing industry will increase by 4.7% in 2023. “This will increase the price pressure stemming from domestic factors, such as Danish businesses’ labour costs,” it adds. The shift towards stronger inflationary pressures means that it will take more time to bring inflation down to the target.

Policy recommendations

Denmark’s lack of an independent monetary policy increases the importance of fiscal policy to secure price stability. The NBD made three main recommendations for fiscal policy-makers.

The central bank said it was very important that “fiscal policy does not counteract monetary policy”. Any compensation for higher consumer prices must be “activity-neutral and retain incentives to minimise, for example, energy consumption”.

It said Denmark’s government must complete its reform of housing tax, scheduled for 2024. One of the reform’s key proposals aims to ensure that housing taxes will again rise and fall with house prices, reducing market volatility.

“If the housing tax reform had been in place before the pandemic, the current price declines in the housing market would likely not be as pronounced, just as the price increases through 2020 and 2021 would also not have been as high,” the central bank said.