lars rohde : monetary policy, foreign exchange intervention and gdp growth seen rising speech by mr lars rohde, governor of the national bank of denmark, at the annual meeting of the danish mortgage banks ’ federation, copenhagen, 25 march 2015. * * * let me first talk about monetary policy. this is an area where the beginning of the year was unusually eventful. the main background factor was the announcement by the swiss national bank on 15 january that it would no longer limit the strength of the swiss franc against the euro. and one week later, on 22 january, the european central bank announced an expansion of its programme to purchase government bonds. already on the afternoon of the announcement from the swiss national bank we began to see a considerable inflow of capital into denmark. the swiss decision seems to have led some foreign investors to purchase danish kroner. in that way they would make a substantial profit if the fixed exchange rate policy were abandoned and the krone appreciated. however, nearly two thirds of the increased demand for kroner in january and february came from domestic market players, including insurance companies and pension funds. they have to some extent wished to insure themselves against losses in the event that the krone appreciated like the swiss franc. this was done by way of hedging. you might say that the pension funds bought insurance policies of no value as abandoning the fixed exchange rate policy has never been on the agenda. obviously it is entirely up to the pension funds and life insurance companies how they wish to place their funds. but nevertheless it is a shame if individual pension savers are forced to bear unnecessary costs. in order to stem the capital inflow, danmarks nationalbank intervened in the foreign exchange market for very large amounts, and we also reduced our monetary policy interest rates on several occasions. the interest rate on certificates of deposit is now – 0. 75 per cent – a level not seen previously. the monetary policy interest rates were reduced in increments. this is because we initially did not know the width and depth of the capital inflows and hence we had to assess the situation on a current basis. in order to further halt the capital inflows, the ministry of finance also decided to suspend issuance of danish government bonds on 30 january. this was done at the recommendation of danmarks nationalbank. since the most recent interest rate reduction, which took effect on 6 february, the krone has been kept stable purely via intervention in the foreign

danish economy as “ robust ”. this can be interpreted in two ways, and both are of relevance to the current situation. robust can either be used to describe an overall favourable macroeconomic balance. it can also mean that the danish economy is not particularly sensitive to the international development. but this is not to say that we are not affected at all. unemployment has risen during the past half - year, but the level is still low compared to other countries in europe and compared to the situation in the 1990s. some economic indicators, e. g. car sales and unemployment, show signs of slowing down, while other statistics, e. g. retail turnover and wage and price increases, point to the opposite. the economic picture is thus not completely clear at the moment. therefore, danmarks nationalbank does not find any grounds to discuss any adjustments to fiscal policy in the current situation. the picture was completely different in 1993, when fiscal policy was relaxed, popularly described as a kick - start of the economy. in 1993 denmark had undergone 7 years with by and large zero growth in gdp. this stagnation was necessary to correct the imbalances of the economy, especially the current account deficit, in the mid - 1980s. during this restoration period unemployment had risen to 12 per cent by 1993, i. e. more than twice today ’ s level. danish wage increases in 1993 were furthermore lower than among our trading partners. the relaxation of fiscal policy achieved in 1993 had an effect concurrently with a considerable stimulus to demand as a consequence of the extensive wave of mortgage conversions. the strong decline in international interest rates in 1993 also had an impact on denmark, and from mid - 1993 to the beginning of 1995 mortgage - credit loans for approximately kr. 300 billion were converted. the fact that the conversion wave was so extensive was not only due to the drop in interest rates, but was also a consequence of adjustments to the mortgage credit act and to tax acts, underpinning the new conversion opportunities. at danmarks nationalbank we have sought to assess the effects of both the expansionary fiscal policy and the conversion wave from 1993. calculations show that the contribution to growth from the drop in interest rates was at least as strong as the contribution attributable to the fiscal - policy relaxation. the calculations also indicate an upswing in consumption, which statistically cannot be attributed to either the conversions or to fiscal policy. it seems that the expectations became more positive, and that this change of mood among consumers also