By CentralBankNews.info
The Danish government has suspended the issuance of domestic and foreign bonds, saying this should help reduce interest rate spreads on longer-dated bonds and limit the inflow of foreign exchange, easing some of the upward pressure on the crown currency.
The Danish central bank, which on Thursday cut its deposit rate for the third time in 10 days to make it less attractive for investors to hold crowns, said rate cuts and foreign exchange purchases had widened the negative spread between money market rates in Denmark and the euro area.
However, the spread for government bonds had remained positive for longer maturity bonds.
On Jan. 29 Danmarks Nationalbank cut its deposit rate by 15 basis points to minus 0.50 percent, following cuts on Jan. 22 and Jan. 19. The lending rate was cut on Jan. 19 to 0.05 percent.
The main objective of Danmarks Nationalbank is to defend the exchange rate of the crown to the euro as a way to control inflation. It uses interest rates to make it more or less attractive to hold crowns and has a central exchange target of 7.46038 crowns to the euro, within a tolerance band of plus/minus 2.25 percent, or a rate of 7.29252 to 7.62824.
The crown strengthened slightly to 7.444221 per euro from 7.44431 prior to the news.
Denmark suspends bond issuance to limit FX inflow
January 30, 2015
“Upon the recommendation of Danmarks Nationalbank, the Ministry of Finance has decided to suspend the issuance of domestic and foreign bonds until further notice.
The large surplus on the government finances in 2014 implies that the sale of government bonds has been greater than the funding requirement. Given the foreign currency situation, it is no longer appropriate to reduce the issuance of government bonds over several years. The balance on the central government’s account at Danmarks Nationalbank is more than sufficient to cover the financing requirement in 2015.
Danmarks Nationalbank has purchased foreign exchange in the market and reduced the monetary-policy interest rates. This has resulted in a widening of the negative spread between money market rates in Denmark and the euro area. The interest rate spreads for government bonds, however, have remained positive in the longer maturity segments.
Danmarks Nationalbank expects that stopping the issuance of government bonds will contribute to reducing the interest-rate spreads in the longer maturity segments and thereby limit the inflow of foreign exchange.”
