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What does ‘historic’ interest rate hike mean for Denmark?

The Nationalbank, Denmark’s central bank, has increased interest rates by 0.75 percent to 0.65 percent.

What does ‘historic’ interest rate hike mean for Denmark?
The headquarters of Denmark's central bank Nationalbanken in Copenhagen. Photo: Philip Davali/Ritzau Scanpix

The Danish central bank confirmed the decision in a statement on Thursday following a similar decision by the European Central Bank (ECB), the central bank for the eurozone.

The increase represents the highest raise in interest rates by the Nationalbank since 1998 and means that interest goes above 0 percent for the first time since 2014. Prior to Thursday’s announcement, Danish central bank interest rates were -0.10 percent.

The Danish increase follows directly from the similar decision made by the ECB, in keeping with Denmark’s monetary policy of parity with the euro, keeping the value of 1 euro at 7.50 kroner. Interest rates must be adjusted concurrently to ensure this.

In general, the interest rate changes seen across Europe on Thursday are of historic proportion.

The accelerating pace of inflation pushed the ECB to reach for the biggest interest rate rise in its history, of 75 basis points, in the hope of taming runaway price rises, news wire AFP reported.

Inflation estimates were meanwhile also raised again by the ECB as the eurozone faces a painful surge in energy prices in the wake of the Russian invasion of Ukraine.

READ ALSO: How much will Danish energy bills go up this winter?

The ECB warned on Thursday that inflation was “far too high” and likely to stay above target for “an extended period” as it made its biggest ever interest rate hike, AFP writes.    

It lifted its inflation outlook for 2022 to 8.1 percent from 6.8 percent previously forecast, and for 2023 it raised the figure to 5.5 percent from 3.5 percent. Consumer price growth is then expected to ease to 2.3 percent in 2024, close to its previous forecast of 2.1 percent.

In Denmark, an increase in interest rates has a similar objective of taking the momentum out of inflation.

That is broadly because higher interest makes it more expensive to loan money and more attractive to save. This can reduce consumer spending and check spiralling prices.

“It’s necessary for the central banks to now show that they will not permit inflation to stay high. That way they can hopefully prevent that an expectation of high inflation can take hold and become self-fulfilling,” Danske Bank senior economist Las Olsen told news wire Ritzau in a written comment.

Higher interest rates are not surprising in the current climate, Sydbank senior economist Søren Kristensen said.

“The interest rate increase today means slightly higher interests [for bank customers] but was broadly calculated for. It is therefore more of a way of cementing the increases in interest rates since the New Year,” Kristensen told Ritzau.

“However, it will have a large significance for the Danish economy and especially the housing market. Here, we expect that increasing interest this autumn will bolster the drops in price we are already seeing,” he said.

Accountholders at Nordea, one of the largest banks operating in Denmark, will see the interest rates on some of their savings flip into the black on September 20th, the bank said following the Nationalbank announcement. 

A handful of other Danish banks scrapped negative interest rates earlier this year, among them Nykredit, Arbejdernes Landsbank and Saxo Bank.

READ ALSO: Denmark’s banks raise interest rates but many still remain negative

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Danish central bank says house prices will fall and inflation continue in 2023

Denmark’s central bank Nationalbanken predicts a decline in house prices in 2023 and 2024 in a new economic forecast.

Danish central bank says house prices will fall and inflation continue in 2023

The prediction on house prices is included in the National Bank’s latest review of the Danish economy’s prospects.

According to the central bank, house prices will fall by an average of 5.6 percent in 2023. They will continue to fall in 2024, dropping by 1.8 percent.

The latest prognosis represents a departure from the previous forecast issued by the national bank in March, in which it said it expected house prices to increase by 1.7 percent next year and by 2.1 percent in 2024.

READ ALSO: Should you buy now if you’re looking for a property in Denmark?

The economy is expected to have a tough year in 2023, according to the Nationalbanken forecast.

Inflation will be 4.3 percent, the central bank says, meaning another year of stinging price increases, albeit at a lower level of inflation than the 8.6 percent expected for the whole of 2022.

In 2024, inflation will return to a lower level of 1.7 percent.

Although GDP is predicted to be up by 2 percent at the end of this year, it will drop by 0.1 percent in 2023 before a 1.2 percent increase in 2024.

GDP predictions are also more pessimistic than they were in the March forecast, which expected a 2.1 growth in 2023.

“We can prepare ourselves for a period with weakened [economic] activity and a fall in employment,” the director of the National Bank, Lars Rohde, said in statements accompanying the release of the forecast.

“But it should be kept in mind that this is happening [in Denmark] at a conjuncture following the coronavirus pandemic, which caused a very pressed labour market,” he said.

“It is important to bring down the high inflation. That will require a significant tightening of financial policies and that will unfortunately be felt by everyone – companies and individuals,” he said.

“If we don’t get inflation under control, the costs for society will just get even bigger,” he said to DR.

EXPLAINED: What’s causing the highest inflation rate in Denmark for almost 40 years?

Projected high energy prices this winter are among causes for the expected continuation of inflation next year. Interest rates have also been pushed up.

Unemployment is predicted to increase slightly but will remain at a comparatively low level of 89,000 next year, Nationalbanken said.

Denmark’s unemployment rate is lower than in most other European countries, resulting in a labour shortage.

“The combination of great strain in the labour market, high demand and high inflation create the risk of a self-fulfilling wage-price spiral in Denmark. We therefore believe that fiscal policy must be tightened as soon as possible to significantly bring down demand. This should be by more than what the government proposes in the draft budget,” Rohde told DR.