Speech by Governor Bodil Nyboe Andersen at the Annual Meeting of the Danish Bankers Association on 1 December 1999
Denmark has enjoyed a number of years of strong growth. This has led to falling unemployment and rising inflation, and for a transition period also a significant current-account deficit. In 1997 and 1998 there was general consensus on the need to ensure a soft landing.
Via the Whitsun package of economic measures the government sought to brake consumption in order to avoid overheating, bottlenecks and a current-account deficit. The Whitsun-package measures did not have an impact as quickly as could have been desired, but there is every indication that this year the course of the economy has become stable. Growth has subsided and the balance of payments has improved signific.antly, while wage increases and inflation are still rather high measured by European standards. It is no longer taken for granted that Denmark complies with the convergence criterion for inflation. At present, we only just fulfil this criterion. It is important that there is broadbased understanding in Denmark that we cannot for a prolonged period have higher wage and price increases than the euro-area member states.
The sound and favourable development in Denmark has, moreover, been rewarded with upgrading to the highest rating, Aaa, by the American rating agency Moody's.
When ministers and central-bank governors sum up a year of favourable cyclical development and minor losses in their speeches to banking circles, they often conclude with a reminder that it is in the good times that the seeds of future problems are sown. This lesson can also be applied to the national economy. Thus, a tight fiscal policy is still needed in coming years, even though the good times have restored surplus to government finances.
There is, as stated, every indication that we are approaching the soft landing we required. It is therefore important to bear in mind when evaluating the economic forecasts put forward by various circles in Denmark and abroad that the expected development must be considered against the background of the slightly too excessive growth we have seen.
There is no reason to be concerned that our growth is dampening and is expected to be lower than in most other European countries. This is a necessity if we are to ensure economic balance, and this is the course we have wished to achieve. So it is quite misleading for a recent newspaper article to describe Denmark's economic prospects as a low-growth trap.
In contrast to 1998, which was affected by several periods of currency unrest, 1999 was an undramatic year in monetary-policy terms. During this year the krone has been extremely stable against the euro. In the course of the year the Nationalbank has gradually reduced the spread between its lending rate and the official interest rate of the European Central Bank, ECB. The spread was 0.95 per cent at the start of the year and is now down to 0.30 per cent.
Moreover, the Nationalbank followed suit when the ECB lowered the interest rate in April and raised it at the beginning of November. This is a consequence of the division of work adopted for economic policy whereby the task of monetary policy is to stabilise the krone vis-à-vis the euro.
This division of labour has functioned well in Denmark for many years. The stable exchange rate and low inflation have been significant to the positive course of the Danish economy in the 1990s.
In the fortunately very rare cases where the currency situation obliges us to tighten monetary policy the interest-rate increases have especially affected capital movements and the money market, and to some degree the banks' interest rates. However, private households have only been affected by these interest-rate adjustments to a moderate degree since home financing has primarily been extended via long-term fixed-yield mortgage-credit loans.
In recent years the short-term interest rates have been significantly lower than the long-term rates and therefore mortgage-credit loans at variable interest rates, called interest-adjustment loans or flex loans, have become quite popular. So far, the outstanding loans at variable interest rates constitute only 5 per cent of total mortgage-credit loans. However, a large proportion of lending by the mortgage-credit institutes is currently extended at variable interest rates. So the overall picture can shift very quickly.
The changes in 1-2 year interest rates have been very modest in recent years. However, in earlier periods, even when inflation was low, we have seen very strong fluctuations in the short-term interest rates. It is therefore important that home owners are aware of the risk of rising interest rates when they raise mortgage-credit loans at floating interest rates. International interest rates may rise, and furthermore the Nationalbank may be obliged to raise interest rates significantly in order to counter speculative pressure against the krone. In such situations it is not pos.sible to take into consideration that private home owners will also be affected.
In June the Nationalbank adjusted the monetary-policy instruments. Lending from the Nationalbank is now extended against collateral of government and mortgage-credit bonds, and not via repo transactions in government bonds as before. This adjustment expanded the lending basis significantly.
Moreover, the monetary-policy counterparties, i.e. those credit institutes which may borrow from and make placements with the Nationalbank, were expanded to include both banks and mortgage-credit institutes.
In connection with this change certain limits were imposed on the individual banks' current-account deposits. However, this limit is only effective if the banks overall exceed the limit of just under kr. 20 billion. In normal circumstances the limits are of no significance. Their purpose is to limit the use of current-account deposits to speculate in changes in exchange rates or interest rates.
The system came under some pressure when the spread between the current-account interest rate and the interest rate for certificates of deposit was as low as 0.10 per cent for a few months. After the adjustment of interest rates at the beginning of November this spread widened.
I would like to take this opportunity to emphasise that the Danish system requires the Nationalbank's monetary-policy counterparties to be prepared to cooperate on the flexible functioning of this system.
Almost one year has passed since the introduction of the euro and it has immediately taken its place as one of the three dominating global currencies.
There has been enormous interest in the European Central Bank and its monetary policy, and this has been natural in view of the great importance of the euro. The task of the ECB is to ensure price stability, defined as price increases of less than 2 per cent. The ECB has formulated its monetary-policy strategy as two pillars. The first pillar is the development in money supply and the second is the development in a large number of financial and other economic indicators of significance to the future development in prices.
In view of the complex monetary-policy strategy the ECB has found it appropriate to issue a monthly bulletin with very detailed reports on the development in the relevant economic variables. This monthly bulletin is translated into all the official languages of the EU. Information is also given via press releases, press conferences and speeches. The ECB's information on the development and the basis for its decisions fully matches the information provided by the central banks which, with some delay, publish minutes of meetings in order to describe the background to the decisions taken. Nonetheless, the ECB is criticised for a lack of openness since it does not also report how each member of the Governing Council voted.
The ECB does not wish to give this information since pursuant to the Treaty the Governing Council is a collegiate body which arrives at a common decision on the basis of discussion among the members. The individual members are required to evaluate the economic development in the entire euro area and on that basis determine the common mon..etary policy.
However, society – in practice the media – takes a great interest in the individuals and how they vote. This is good material and to dramatise matters further ornithological designations are given to central-bank figures. The members are characterised as respectively doves and hawks, depending on how eager they are to raise interest rates.
This may have a certain entertainment value, but it does tend to draw interest away from the issue at hand, namely the basis for the decision taken. In view of the 17 members and 11 nationalities represented on the ECB's Governing Council it would seem reasonable to maintain the principle of a council which takes decisions collectively and publishes its grounds as one single entity.
I would like to close with a few remarks concerning the millennium roll-over which has made it necessary to make extensive adjustments to computer systems all over the world. In Denmark, each financial institution has tested its own programs, and so has the Nationalbank of course.
The interrelations between the systems have also been tested via the sector test. After this extensive process the sector finds that the transition will not impose any significant problems.
However, in certain countries myths have arisen concerning various strange phenomena which will come into play at the millennium roll-over. One of these myths is that customers' balances with banks and savings banks will disappear. Unfortunately, this myth has also spread to Denmark. I would like to warn people most emphatically against carrying out unusual financial transactions, for example withdrawal of large amounts of cash, on the basis of this myth.
As already mentioned, the systems have already undergone extensive testing to ensure a smooth transition.
However, should one of the systems still break down in the days up to the millennium roll-over, or just after, people's balances will not just vanish, nor should customers with bank debts be under any illusions as to whether they will disappear.
There is always extensive back-up material to ensure that any computer run which for one reason or another has failed can be reconstructed.
We have all at some time found a cash dispenser to be out of order, and we have all visited our local branch and discovered that the system was off-line. The solution we choose is to find another cash dispenser or branch or to wait a few hours or days and then try again. But we would never even imagine that the system's breakdown would cause our balance to disappear.
Note circulation is always extremely high around New Year. This year the Nationalbank has extra large stocks of used notes because withdrawn notes in the old series have not yet been destroyed. Nonetheless, the Nationalbank would like to warn people strongly against beginning to stock up banknotes for the New Year, since this will merely increase the risk of robberies and burglaries.
Turnover on the financial markets is often very low around New Year, which can lead to exaggerated interest-rate fluctuations. To ensure a stable money-market interest rate in the period around New Year, as an extraordinary measure the Nationalbank will give access for both purchase and sale of certificates of deposit just before and just after New Year.
As tradition dictates, I would like to conclude by acknowledging the fine spirit of cooperation which has prevailed between the Nationalbank and the Danish Bankers Association and its members. This year I would like to emphasise in particular the current cooperation on a number of new projects. These concern the development of systems for payment transactions, the adjustments to the monetary-policy instruments and to the payments statistics, as well as the establishment of the new MFI statist.ics. Moreover, the cash-supply system is being restructured. All of these areas have required and will continue to require dialogue between the Nationalbank, the Danish Bankers Association and the banks' represent.atives.
In addition to the major projects a process is under way to expand the ongoing contact between employees at all levels at the Nationalbank and within the financial sector. We find this to be of great benefit to both parties involved.
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Version 1.0 March 2000 Nationalbanken.
Published by Danmarks Nationalbank March 2000, http://www.nationalbanken.dk