Fitch: Danish Krone Peg Defence Looks Credible, But Has Risks
Danmarks Nationalbank cut its interest rate on certificates of deposit for the fourth time this year, to -0.75%, on 5 February. The central bank has also increased its purchases of foreign exchange in the market, and the Ministry of Finance has suspended bond issuance until further notice on the central bank's recommendation. But it is not yet clear what further actions the authorities might have to take.
Accumulating reserves generates positive carry for the central bank (at current interest rates), but increases the risk of a negative valuation impact at a later date if the peg is not maintained indefinitely. Negative deposit rates could also reduce bank profitability by reducing net interest margins, as they will be difficult to pass on to retail depositors. More broadly, there is a risk that monetary easing to defend the peg will result in a build-up of credit risk in the financial system.
If the peg were abandoned, sharp krone appreciation would also carry risks. The impact would vary across sectors. Our full report 'Danish Krone Peg Defence Looks Credible, But Carries Risks' is available to subscribers at www.fitchratings.com or by clicking the link.