Since mid-September there has been an increase in ECB’s marginal rate. This has reduced the spread between Danmarks Nationalbank’s lending rate and ECB’s marginal rate. Recently the interest-rate spread has been negative, which has led to an outflow of foreign exchange.
Danmarks Nationalbank has intervened in the foreign-exchange market to support the krone. The intervention has now reached a point which leads to Danmarks Nationalbank’s increase of the lending rate. The size of the change in the interest rate reflects the need to establish a positive interest-rate spread.
So, because of higher interest rates in Euroarea, it was leading to capital outflows from Denmark.
However, ECB just lowered its rates . So, in a way Denmark didn’t need to do anything. It just acted before the ECB announcement and could end up making a mess.Is there any coordination between European authorities? And this is happening after the promise by EU countries that they are united.
And what is also not understood fully is that Denmark announcement has come when its financial system has collapsed as well. Danish government has promised to guaarantee all bank deposits as confidence in their banks has evaporated. So why raise rates?
It is getting really complex.
As I finised this post, I received an update from Denmark Central Bank which says as of now interest rates are maintained. I have a feeling it would have to reverse its stance prtty soon.