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Report of the Board of GovernorsSummaryThe basis for Denmark's monetary and foreign-exchange policy is the fixed-exchange-rate policy vis-ā-vis the euro. In its policy statement the new government that took office in November 2001 has confirmed that the fixed-exchange-rate policy will be continued as the basis for the economic policy. Since the start of the third stage of EMU Denmark has participated in the exchange-rate mechanism, ERM II. After Greece joined the euro area on 1 January 2001 Denmark is the sole participant. Denmark has entered into an agreement whereby the krone is part of the exchange-rate mechanism with a fluctuation band of +/-2.25 per cent around the central rate against the euro. In order to maintain a stable krone rate Danmarks Nationalbank may both intervene in the foreign-exchange market and adjust the official interest rates. During 2001 the European Central Bank (ECB) lowered its interest rates on four occasions by a total of 1.5 per cent. On each occasion, Danmarks Nationalbank followed suit by lowering the Danish interest rates. The discount rate was reduced in step with the ECB's interest rates, while the lending rate was lowered further, in view of the strength and stability of the krone. Moreover, Danmarks Nationalbank unilaterally lowered the lending rate on three occasions during 2001. The background is that immediately after the referendum on Denmark's participation in the euro Danmarks Nationalbank raised the lending rate in order to avoid uncertainty concerning the krone rate, but held the discount rate unchanged. The spread between the lending rates of Danmarks Nationalbank and the ECB narrowed by 0.30 per cent during 2001, and closed the year at 0.35 per cent. The spread narrowed further in 2002. After the terrorist attacks on the USA on 11 September, the Federal Reserve lowered the fed funds target rate by 0.5 per cent in order to counter the uncertainty concerning the course of the economy arising after the attacks. On the same occasion, the ECB lowered its interest rates by 0.5 per cent, while a number of other central banks also reduced their interest rates. The Federal Reserve reduced the interest rate on a total of 11 occasions in 2001, seven times before and three times after the terrorist attacks, in order to prevent a hard landing of the economy. Overall, the US rate was cut by 4.75 percent to 1.75 per cent, the lowest level for 40 years. The terrorist attacks affected New York's financial centre. The US bond market was closed and was not re-opened until 13 September, while the New York Stock Exchange was closed for almost a week. There were no major interruptions to payment systems. The Federal Reserve immediately made considerable amounts of liquidity available, and several other central banks, including Danmarks Nationalbank, undertook extraordinary operations to contribute liquidity in order to ease the functioning of the money markets. The Danish foreign-exchange market took a stable course in 2001 and Danmarks Nationalbank only intervened on rare occasions. The foreign- exchange reserve was kr. 27.5 billion higher at the end of 2001 than at the beginning of the year, primarily as a consequence of a large influx of foreign exchange at the end of September that was e.g. related to portfolio adjustments in the life and pension insurance sectors. Long-term yields in the USA and Europe closed 2001 at around the same level as at the beginning of the year. However, the fluctuations during the year were considerable, and in the autumn long-term yields briefly reached a very low level. In Denmark too, the yields were stable for the year overall. Yields fell by more in Denmark than in Germany in the autumn, and the 10-year Danish-German yield differential narrowed from 0.3 to 0.2 percentage points. During 2001 the dollar strengthened by approximately 5 per cent against the euro. On 1 January 2002 euro banknotes and coins were put into circulation in the 12 euro-area member states, marking the completion of the Economic and Monetary Union. The actual changeover to the euro did not present any significant problems, and was achieved more quickly than expected. After only a few weeks most cash payments already took place in euro. The global economy almost came to a standstill during 2001. In autumn 2001, the OECD evaluated the growth in the gross domestic product (GDP) of Denmark's trading partners at 1.3 per cent in 2001. This is the lowest level for eight years, and reflects stagnation or a direct decline in large parts of the year. The negative trends were strongest in the USA and Japan, but the euro area was also affected. The significant drop in oil prices dampened price development. The global economy weakened, but the Danish economy stayed relatively robust in 2001. Unemployment remained low and the balance of payments showed a sound surplus of kr. 34billion. The rate of price increase fell, and was lower on average than in the euro area. Nonetheless, economic growth was below the level of 2000, while domestic demand was by and large unchanged. A short-lived weakening of the global economy is not a problem for the Danish economy in the current situation of high capacity utilisation and a tight labour market. The rate of wage increase exceeds the level in the euro area, however, and there is a risk of sustained high wage increases and deteriorating competitiveness. It is necessary to ease the pressure on the labour market by ensuring a stronger influx to the labour force, and better utilisation of idle resources. The future demographic structure of the population makes it important to reduce the government debt further, in order to ensure sufficient economic scope in the future. This requires a surplus on government finances. A sound surplus will also give some leeway for the automatic stabilisers to offset any future cyclical downturn. The Danish banks continued to present sound earnings with substantial profits for the seventh consecutive year, although losses and provisions have increased in view of the slowdown of the economy. The mortgage-credit sector also reported higher profits in 2001 in view of the expansion of lending activity and high volume of conversions. Investment associations achieved a good increase in the circulating volume of investment certificates. Since the 3rd quarter of 2001 Danmarks Nationalbank has published new quarterly statistics for investment associations with details of the breakdown of ownership of investment certificates by sector. Danmarks Nationalbank's new payment system, Kronos, was launched on 19 November 2001, replacing Danmarks Nationalbank's previous payment systems. In 2001 Danmarks Nationalbank and the Danish Financial Supervisory Authority established a cooperation agreement on surveillance of systemically important payment systems. Danmarks Nationalbank issued 10- and 20-krone coins with a new portrait of the Queen in 2001. A new Faroese 50-krone note was issued in 2001 as the first in a new series of Faroese banknotes. Danmarks Nationalbank's accounts for 2001 show a profit of kr. 4.8 billion, against a profit of kr. 5.7 billion in 2000. The principal factor behind the change is a decrease in value adjustments by kr. 1.2 billion to kr. 0.1 billion. Of the profit for the year, kr. 3.3 billion is payable to the central government, increasing the net capital of Danmarks Nationalbank by kr. 1.5 billion to kr. 46.7 billion. |
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Version 1.0 March 2002 Nationalbanken. |