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Danish central bank raises interest rate by 0.5 percent

Denmark’s central bank Nationalbanken raised its interest rate by 0.5 percent on Thursday in response to a similar move by the European Central Bank (ECB).

Published: 16 March 2023 17:48 CET

Danish central bank raises interest rate by 0.5 percent

A file photo of Denmark's central bank, Nationalbanken. File photo: Jeppe Bjørn Vejlø/Jeppe Vejlø/Ritzau Scanpix

The Danish central bank confirmed the decision in a statement after the ECB earlier on Thursday increased its rate by the same amount, bringing it up to 3 percent.

The latest raise is the sixth time within the last year that the ECB has put its interest rate up.

The new rate is the highest set by the ECB since the Global Financial Crisis in 2008.

The Danish National Bank’s interest rates are slightly lower than the ECB’s — 2.6 percent for deposits and 2.75 percent for loans following Thursday’s increases. That is because Nationalbanken increased its interest rates by 0.15 percent less than the ECB the last time the rates were raised, at the start of February. Similarly, it raised its rate by slightly less than the ECB in December.

There is nothing unusual about the Danish central bank’s decision to follow the ECB in raising the interest rate, however.

Earlier this week, Nationalbanken called for political measures to keep a rein on inflation as it said wage increases given to people under the Danish labour system in 2023 and 2024 could help to keep inflation levels up.

It also predicted house prices are set to fall by almost 10 percent this year.

One effect of raised interest rates is that people who have variable rate mortgages could find themselves paying more for their loans.

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Explained: Why Denmark's economy is looking in such extremely good shape

“When I stood here a year ago and presented my first financial statement, it was with a message that the Danish economy was heading for a soft landing. We have since been strengthened in that assessment,” Stephanie Lose, Denmark’s economy minister, said at a press conference announcing the government’s Økonomisk Redegørelse, or financial statement, for May.

In the press statement, she said, “optimism is returning to the Danish economy”, with the economy likely to improve further in the coming year.

“We have carried out reforms that make Denmark richer and help to secure the necessary workforce for Danish companies,” she said.

How has the government changed its growth forecasts?

The government has increased its expectation for Denmark’s growth rate since its last statement in December, with it now expecting 2.7 percent growth in 2024, up from the1.4 percent it expected for the year in December.

It has also upgraded its expectations for 2025, predicting growth of 1.8 percent compared to the 1 percent it expected back in December.

Lose said that the pharmaceutical company Novo Nordisk, which is expanding rapidly as a result of the success of its weight-loss drugs Ozempic and Wegovy, had driven much of Denmark’s recent growth, with the reopening of Denmark’s gas field, the Tyra field, would start to contribute to growth soon.

“In the past two years, the pharmaceutical industry in particular has driven growth in the Danish economy, while there has been stagnation or decline in large parts of the rest of the economy,” she said. “In the coming years, other industries again look set to contribute to growth. Added to this is the reopening of the Tyra field in the North Sea, which also contributes to growth in GDP.”

What does the government expect to happen to inflation?

Denmark’s inflation rate fell rapidly from a peak of over 10 percent in October 2022 to below 2 percent in September 2023, where it has stayed ever since. But Lose said she expected the rate to edge up over the coming years.

“Inflation has fallen quickly and faster than expected,” Lose said. “In the new forecast, we expect inflation to rise in the coming months, as the prices of services and energy pull in the direction of slightly higher inflation.”

What does the government expect to happen to employment?

Thanks mainly to Novo Nordisk increasing staffing to manage the success of its new drugs, and the bounce back from the pandemic, employment has also held up better than expected.

Employment soared by some 160,000 people between 2021 and 2023, and the government now expects the number of employed people to grow by a further 13,000 in 2024 but to then fall by 18,000 in 2025.

“Employment has long been at a sky-high level, so it is estimated that we will see some adjustment. But we do not expect an extensive setback, because the Danish economy stands on a rock-solid foundation,” Lose said.

What does the government expect to happen to housing prices?

The government has significantly upgraded its expectations of what will happen to the price of domestic property this year. It now expects prices to increase by an average of 3.2 percent in 2024 and 3 percent in 2025, a rise of two percentage points on the 1.2 percent rise for 2024 it expected when it made its last forecast in December.

This is due to the continued strong labour market, which has seen rising incomes and wage increases in Denmark as a result of new collective agreements, at the same time as Denmarks Nationalbank is expected to cut interest rates.

This rise follows two consecutive years of falling real house prices in 2022 and 2023.

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