Report of the Board of Governors
Summary
For decades the basis for Danish monetary policy has been the fixed-exchange-rate policy in various forms. Denmark participated in the European Monetary System, EMS, throughout its lifetime. The introduction of the euro on 1 January 1999 has entailed no change in the fixed-exchange-rate policy. The krone is now linked to the euro via its participation in the exchange-rate mechanism, ERM II, with a fluctuation band of +/- 2.25 per cent and a central rate which is equivalent to the previous central rate vis-à-vis the D-mark.
In recent years the Nationalbank has stabilised the krone close to its central rate against the D-mark, and now the euro. Underlying trends for fluctuation in the krone rate are countered by purchasing or selling foreign exchange and by adjusting the Nationalbank's interest rates. The krone was very stable against the euro in 1999, with an underlying tendency to strengthen in the 1st half-year. As a consequence, the Nationalbank purchased foreign exchange and the foreign-exchange reserve increased by kr. 64 billion to kr. 165 billion in 1999.
Against the background of the inflow of foreign exchange the Nationalbank lowered its official interest rates in several small steps during the 1st half of 1999. Furthermore, in April 1999 the Nationalbank lowered its official interest rates in connection with a reduction of interest rates in the euro area, and in November 1999 and February 2000 the Nationalbank increased its interest rates after rates in the euro area were raised. The short-term interest-rate differential to the euro area narrowed in 1999 and was around 0.4 per cent at the close of February 2000.
In 1999 the Nationalbank's monetary-policy instruments were adjusted in a number of areas. These were primarily technical adjustments which did not affect the overall framework for the conduct of monetary policy.
The international financial markets stabilised in 1999 after the unrest in 1998. Together with the rising level of growth during the year this contributed to a significant increase in long-term bond yields in most industrialised countries in 1999. In the course of the year long-term interest rates in the USA rose by around 1.8 per cent and in Germany by around 1.5 per cent. In Denmark the 10-year yield differential to Germany was around 0.35 per cent in February 2000. The euro weakened against the dollar and the yen in 1999.
The gross domestic product, GDP, of Denmark's trading partners is estimated to have increased by 2.1 per cent in 1999. The upswing in the USA continued in 1999, while growth in the euro area accelerated during the year. The financial crisis in Southeast Asia has been overcome, but the situation in Russia is still uncertain.
After several years of strong growth the Danish economy lost momentum in 1999. GDP is estimated to have increased by 1.5 per cent in 1999. The lower growth was due to more subdued domestic demand, which reduced the imbalances in the economy.
A strong improvement in the trade balance reversed the deterioration in the balance of payments seen in recent years, and the current account is estimated to show a surplus in the range of kr. 10 billion in 1999, equivalent to 0.9 per cent of GDP. The improvement is related to higher exports as a consequence of the emerging upswing in Europe, lower capacity utilisation and a weaker effective krone rate. At the same time growth in imports diminished as a consequence of a strong reduction of stocks and subdued domestic demand.
In view of the continued dampening of domestic demand and higher exports it is possible to keep unemployment low while also reducing the external debt.
The Danish economy has made a "soft" landing and exports have recovered strength, but wage growth and inflation are high.
Unemployment continued to fall in 1999, reaching 5.4 per cent at the close of the year. Maintaining high GDP growth requires an increase in the supply of labour, unless productivity can be increased significantly in the future.
The rate of wage increases for the whole of 1999 was an average of 4.4 per cent, as in 1998. There was a slight dampening during 1999. Since 1996 wage increases have exceeded wage increases in the euro area. The high Danish wage increases can present a challenge to Danish competitiveness and the objective of price stability. Therefore it is important that the dampening of wage growth is sustained.
Despite reduced pressure on capacity consumer prices accelerated, which is for example related to higher energy and food prices. The inflation rate exceeds the rate of price increases in the euro area and at the close of 1999 equalled the inflation criterion for participation in the euro area.
For many years monetary policy has been used to stabilise the exchange rate. It is the task of fiscal policy and other economic policy to manage domestic demand and to ensure that the course of the economy is compatible with the requirements of the fixed-exchange-rate policy. In 1999 overall economic policy contributed to a dampening of domestic demand. The Finance Act for 2000 entails a more expansionary fiscal policy than proposed by the government in the Finance Bill for 2000. Monetary conditions continue to be expansionary, which makes it even more imperative to maintain the fiscal-policy objectives.
The banks' total profit for the year rose to just over kr. 14 billion. Losses and provisions on debtors decreased by almost 5 per cent. The mortgage-credit institutes are also expected to present a favourable profit for the year. The assets of investment associations increased considerably in 1999.
In 1999 the Nationalbank completed the issue of the new banknote series. In May the Nationalbank issued a new 50-krone note and in November a new 100-krone note. Preceding the millennium rollover the Nationalbank initiated a series of extraordinary measures to ensure a sufficient supply of cash.
The joint European payment system, TARGET, entered into force simultaneously with the introduction of the euro. The Danish part of TARGET, DEBES, was introduced without problems.
Considerable work has been done within the IMF and the EU to standardise economic and financial statistics. This makes requirements of the Danish financial statistics. In cooperation with Statistics Denmark the Nationalbank is expanding the statistical basis in order to comply with the guidelines set out.
The Nationalbank's transition to year 2000 was smooth.
The Nationalbank's accounts for 1999 show a profit of kr. 1,472 million. Negative value adjustments, etc. were kr. 3,081 million. After the transfer of kr. 3,081 million from the Value Adjustment Reserve and the allocation of kr. 1,366 million – equivalent to 30 per cent of the profit before value adjustments – to the General Reserves the remainder of kr. 3,188 million is payable to the central government.
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Version 1.0 April 2000 Nationalbanken.
Published by Danmarks Nationalbank April 2000, http://www.nationalbanken.dk