Analyses focus on current issues of particular relevance to Danmarks Nationalbank’s objectives. The analyses may also contain Danmarks Nationalbank’s recommendations. They include our projections for the Danish economy and our assessment of financial stability. Analyses are targeted at people with a broad interest in economic and financial matters.
Policy rates have been lowered, but monetary policy remains restrictive
Danmarks Nationalbank followed the European Central Bank’s (ECB’s) policy rate cuts of 25 basis points in both June and September. This leaves the monetary policy interest rate spread unchanged. Danmarks Nationalbank assesses that monetary policy and financial conditions remain restrictive in Denmark. Due to a continued moderation in inflation, market participants expect lower monetary policy rates in the euro area and Denmark to moderate the degree of monetary policy restriction over the coming year.
Key messages
Main chart
Monetary policy remains tight, but the degree of restriction is expected to moderate
Note:
The chart shows Danmarks Nationalbank's current account rate and market participants' expectations for ESTR minus the current monetary policy rate spread between the euro area and Denmark. The shaded area indicates estimates of neutral levels of the current account rate. The estimate for the neutral monetary policy is based on the spread between Danmarks Nationalbank's estimates for the natural real interest rate plus 2 percentage points (the ECB's inflation target), see box 4 in the chapter Developments in macro-financial conditions. The estimates are subject to considerable uncertainty, see the confidence intervals in chart 26. Market participants' expectations are as of 18 September 2024.
Source:
Danmarks Nationalbank.
Why is this important?
The Danish fixed exchange rate policy implies that monetary policy is conducted to maintain a fixed exchange rate of the Danish krone towards the euro. The fixed exchange rate policy means that Danmarks Nationalbank will typically follow interest rate changes of the ECB. Therefore, the monetary policy of the euro area is important for the financial and economic development in Denmark. Global financial developments are also important for Denmark, as a small open economy closely integrated in the global financial system. Both parts are analysed in chapter 1. Global financial developments can also affect the demand for Danish kroner and thereby Danmarks Nationalbank’s implementation of the fixed exchange rate policy. This is one element in chapter 2 of the publication. Chapter 3 analyses how the fixed exchange rate policy and the global financial developments affect macro-financial conditions in Denmark. They are important for Danmarks Nationalbank’s assessment of the current and projected economic developments in Denmark.
The analysis is published twice a year in March and September.
The analysis consists of a Danish and an English version. In case of doubt as to the correctness of the translation, the Danish version will prevail.
Editing completed on 18 September 2024