Recent Economic and Monetary Trends

This review covers the period from February 2006 to the middle of May 2006

Growth in the global economy is broadly based. The booming US and Asian economies also benefit the euro area and Japan. Growth in the euro area was previously mainly export-driven, but domestic demand is now also picking up. The short-term prospects for the global economy are good, but there is a risk that the very large global trade imbalances have not been resolved. Moreover, oil prices have reached new heights, partly due to uncertainty concerning deliveries from Iran, as well as
unrest in Nigeria.

INTERNATIONAL FINANCIAL AND COMMODITY MARKETS

The tendency for the US dollar to weaken vis-à-vis the euro continued, particularly after the speech by the Federal Reserve Chairman to Congress on 27 April. In the market the speech was taken to indicate that the period of monetary-policy tightening was coming to an end. In mid-May the exchange rate was 1.28 dollars per euro. The dollar was more or less constant against the yen for most of the period.  

The yield on a 10-year US government bond has been increasing since late February and reached 5.1 per cent in mid-May, cf. Chart 1. Among other things, the development in the long-term yield reflects a certain upward adjustment of inflation expectations among market participants, since inflation has been rising, while a number of key indicators have pointed to increased economic activity. Long-term yields in Germany have followed the same pattern as in the USA, but at a level around 1 percentage point lower. The 3-month money-market rate in the euro area rose by approximately 0.4 percentage points from the turn of the year to mid-May. The strongest increase was seen in February, i.e. before the European Central Bank, ECB, raised its key interest rates.

The oil price has fluctuated at a high level, reaching around 70 dollars per barrel (Brent) in mid-May due to uncertainty concerning future oil supplies from Iran, as well as unrest in Nigeria. The price was thus at the same level as in September 2005, when a hurricane in the Mexican Gulf disrupted production.

Towards mid-May considerable downward price adjustment was seen in the global equity markets, in most cases in line with the gradual increase since the beginning of the year, cf. Chart 2. This development primarily reflects increasing uncertainty in the financial markets. It remains to be seen whether the relatively undramatic adjustment that has already taken place is sufficient, or whether more is in store.

The growth in the global economy has led to increased demand for metals, for which prices have generally risen substantially, but are highly volatile. The gold price in dollar terms has more than doubled since 2000, cf. Chart 3. Part of the explanation is that e.g. hedge funds have invested in gold in anticipation of continued price rises.

INTERNATIONAL ECONOMIC DEVELOPMENT

USA
The USA remains in a stable upswing. GDP in the 1st quarter of 2006 was 3.5 per cent higher than one year before. In the 1st quarter, private consumption rose by 1.3 per cent over the preceding quarter. Employment grew, and unemployment was 4.7 per cent in April. This was the lowest level since 2001. Forward indicators such as the ISM index have also been high during the last couple of months, at more or less the same level as in 2005, cf. Chart 4.

After a prolonged period of rising housing prices, the last few quarters have seen a dampening tendency, and the property market has become less optimistic. In the longer term this may contribute to reducing consumption-driven growth. The development in the housing market should be seen against the background of the tightening of monetary policy since mid-2004.

In April, consumer prices were 3.5 per cent above the level one year earlier, cf. Chart 5. Core inflation, i.e. consumer prices excluding energy and food, has been stable in recent years, on the high side of 2 per cent, but edged up slightly in March and April. In spite of the favourable development in the labour market there are no indications of major wage increases.

The Federal Reserve continued to raise the Fed funds target rate at its meetings in March and May, by a total of 50 basis points to 5.0 per cent. Most market participants see the press release in connection with the latest increase as a signal that the series of monetary-policy tightenings, i.e. increases by 25 basis points at 16 consecutive meetings, may have come to an end. The development in and prospects for inflation and economic growth in the near future will determine the next steps to be taken.

The 1st-quarter US trade deficit was by and large unchanged compared to the end of 2005. The rising interest rates entail higher US interest payments to abroad since the US foreign debt to a large extent comprises non-residents' portfolios of US government securities. This makes greater demands of the development in the trade balance in connection with the resolution of the external imbalances.

Euro area
The upswing in the euro area became slightly more pronounced in the 1st quarter of 2006, when GDP was 2.0 per cent higher than one year earlier.

Consumer confidence has remained more or less unchanged since the beginning of 2006, but the level is higher than in 2005. Corporate earnings have increased, and business confidence, measured by e.g. the PMI index for manufacturing, has risen, cf. Chart 4. Euro area unemployment has been falling since the beginning of 2005, to just over 8 per cent of the total labour force in the 1st quarter of 2006. There are indications that exports from the euro area, particularly Germany and France, picked up substantially in the 1st quarter of 2006.

The growth rate varies among the member states, especially in terms of private consumption. Consumer confidence in Germany has improved considerably in 2006 compared with 2005, but this has not yet been reflected in a significant rise in actual consumption. The development in consumption in France and Spain has been considerably more positive. However, consensus estimates point to rising German private consumption towards the end of the year, prior to the VAT increase in January 2007. The Ifo index of German business confidence has reached the highest level for 15 years, and industrial output in Germany has been rising since mid-2005, cf. Chart 6. Over time there has been considerable covariation between GDP and the Ifo index.

Calculated according to the national definition, unemployment in Germany exceeded 11 per cent of the total labour force, but the tendency for the number of full-time employees to fall has been halted. Total employment has been virtually unchanged for a number of years, buoyed up by an increased number of part-time jobs, including subsidised low-pay jobs. It is key to growth in Germany, and in the euro area overall, that people in subsidised jobs eventually move on to regular full-time occupation. This contributes to stable domestic demand, more permanent growth and improved government finances.

Unemployment in France is only slightly below the German level, and as part of the efforts to combat unemployment the OECD recommends a more flexible French labour market, including lower minimum wages and better opportunities for enterprises to adjust employment to production. If it is difficult to dismiss staff, enterprises are reluctant to take on more people when production increases, and consequently youth unemployment in France is more than twice as high as average unemployment. In March the French government had succeeded in getting a labour market reform that could ease the rigid structures through parliament, but this led to widespread civil unrest. In view of the strong resentment against the reform, the French president withdrew the bill.

A number of euro area member states still fail to observe the Stability and Growth Pact, cf. the article on pp. 61ff.

In April the euro area Harmonised Index of Consumer Prices, HICP, was 2.4 per cent higher than in the same period of the preceding year, cf. Chart 7. The price development reflects the rising energy prices. Consumer prices excluding energy and unprocessed food rose by 1.6 per cent year-on-year in April. 

On 2 March, the ECB decided to raise its minimum bid rate by 25 basis points to 2.50 per cent, referring to the increased risk that the oil price rises would spread to other areas in conjunction with the improved prospects for economic growth and robust rates of growth in the money supply and lending. The financial markets expect this increase to be
followed by several more during 2006.

Japan and China
Total output in Japan, measured by GDP, was 3.1 per cent higher in the 1st quarter of 2006 than in the same period of the preceding year, so that the positive development from 2005 continued. Particularly exports rose in the 1st quarter, while the contribution from net exports to GDP growth was modest since imports were rising as a result of the sustained improvement in domestic demand. One indication of the improved economy is that prices of commercial properties have ceased to decline. Consumer prices rose by 0.4 per cent year-on-year in April 2006, and the year-on-year increase has thus been positive since January. In March the central bank decided to abandon the quantitative easing of monetary policy that commenced in March 2001. At that time the Bank of Japan changed the focus of its operational target from the short-term money-market rate to the monetary-policy counterparties' deposits with the central bank, while the short-term interest rate was set at zero.^[1] In the coming months the Bank of Japan will reduce the scope of its liquidity allocations. At the same time, it has indicated that future monetary policy should aim at inflation of 0-2 per cent per annum, and that the official interest rate will be kept at zero for the time being. The financial market has calculated with increases in the interest rate starting some time during the autumn, and the yield on a 10-year government bond rose from 1.4 per cent at the beginning of 2006 to around 1.8 per cent in mid-May.

The Chinese economy continued to expand rapidly, growing by around 10 per cent year-on-year in the 1st quarter of 2006.

In April, the People's Bank of China raised the 1-year lending rate from 5.58 per cent to 5.85 per cent, the first increase in 18 months. At the same time the central bank issued guidelines to the banks with a view to limiting credit extension to certain sectors.

UK
In the 1st quarter, GDP rose by 0.6 per cent over the preceding quarter, which is at the level of growth in 2005, but still somewhat below the 2003 and 2004 growth rates. Retail turnover picked up again after a dive in January, and a positive trend in goods exports has boosted manufacturing output.

In April consumer prices were 2.0 per cent higher than one year before, while core inflation was 1.3 per cent.

Sweden
The Swedish economy is in a strong upswing and employment has begun to rise. So far the impact on unemployment has been marginal, with 5.5 per cent of the total workforce out of work in March.

Private consumption has been underpinned by continued high increases in housing prices.

In April 2006 consumer prices rose by 1.5 per cent compared to one year before, which was more than in the preceding months. Inflation is thus within Sveriges Riksbank's monetary-policy target zone, i.e. inflation of 2 per cent year-on-year +/- 1 per cent.

Since the turn of the year, Sveriges Riksbank has raised its repo rate on two occasions, by a total of 50 basis points. With a rate of interest of 2.0 per cent, monetary policy remains expansionary. Sveriges Riksbank motivated the increases by the upswing in the Swedish economy. Moreover, in recent years inflation has been curbed by weak growth in import prices and strong productivity growth. Finally, the very low level of interest rates has contributed to rapidly rising housing prices and high growth in lending to households.

Norway
There is also a strong upswing in Norway. The labour market tightened further during the spring, and unemployment was 3.9 per cent in February.

Norwegian consumer prices rose by 2.7 per cent year-on-year in April. Stripped of the impact of taxes and energy prices, inflation was 0.8 per cent in April, and thus still below Norges Bank's intermediate target.   

In March, Norges Bank raised its sight deposit rate by 25 basis points to 2.50 per cent. In this connection Norges Bank stated that a strong Norwegian economy would require several small, not too frequent, increases in order to restore interest rates to a more normal level.

Iceland
The Icelandic economy has been in a strong upswing which has attracted international attention, but the most recent months have seen considerable unrest, cf. Box 1. Since New Year, the Icelandic krona has declined by more than 20 per cent vis-à-vis the euro. Seðlabanki Íslands raised its repo rate by increments of 75 basis points in both March and May, to 12.25 per cent at present.

TURBULENCE IN THE ICELANDIC ECONOMY	Box 1
Since mid-February, Iceland has suffered financial unrest. The Icelandic krona has weakened, and after having risen sharply for several years equity prices, particularly bank equities, have fallen. The background is mounting concern about the development in the Icelandic economy and the Icelandic banks' financing. The Icelandic economy has been booming for the last three years. The driving force has been domestic demand, which has continued to accelerate, growing by 15 per cent in 2005. The main factors have been large investments in aluminium works in order to exploit Iceland's rich access to energy, as well as a doubling of property prices in the Reykjavik area since 2002. Combined with more liberal mortgage financing this has stimulated household demand. In spite of an appreciable monetary-policy tightening, cf. the Chart (left), in the last year the economy has shown ever clearer indications of overheating. In 2005 the current-account deficit grew to 16 per cent of GDP. The labour market has tightened. In the 1st quarter of 2006, unemployment was a mere 1.2 per cent of the labour force, and the rate of wage increase exceeded 8 per cent year-on-year. Moreover, the development in the official consumer price index has increasingly exceeded Seðlabanki Íslands' inflation target of 2.5 per cent, cf. the Chart (right). Special treatment of the housing item in the index has, however, contributed significantly, and HICP has increased less in recent years. In parallel with the boom, various Icelandic corporations have made substantial acquisitions in foreign countries, not least in the UK and Denmark. These acquisitions have to a large degree been financed by Icelandic banks. Since the banks' deposits have been insufficient to finance the surge in lending, they have had to borrow in the international financial markets. Consequently, a large part of the banks' financing is on a short-term basis. In February, the imbalances in the economy led the Fitch rating agency to express concern about the creditworthiness of the Icelandic government. Subsequently attention was turned to the banks' short-term lending, which may prove to be considerably more expensive after refinancing, and the risk that the economy may be heading into a recession. The reassessment of the Icelandic economy and the Icelandic banks led to several months' weakening of the krona and falling equity prices. By mid-May the Icelandic krona was almost 20 per cent weaker than three months earlier, while bank equities had dived by 20-25 per cent. Severe measures will presumably have to be introduced in order to resolve the imbalances. However, this is no new situation in Iceland. The economy is very flexible, so the period of adjustment is not likely to be long, provided that a stability-oriented economic policy is pursued.
SELECTED KEY FIGURES OF THE ICELANDIC ECONOMY
Source: EcoWin.

DANISH MONETARY AND FOREIGN-EXCHANGE ISSUES

On 17 February 2006, Danmarks Nationalbank unilaterally raised its lending rate by 10 basis point, to 2.50 per cent. The background was a considerable outflow of foreign exchange in the first two weeks of February, which tended to weaken the krone. The outflow of foreign exchange was, among other things, attributable to purchases of foreign equities and other securities by Danish institutional investors. Danmarks Nationalbank intervened by selling foreign exchange for net kr. 34 billion in February. The increase in the lending rate restored balance to foreign-exchange flows, and the krone stabilised around its central rate.

When the ECB increased its interest rates on 2 March 2006, Danmarks Nationalbank followed suit, raising its lending rate from 2.50 to 2.75 per cent with effect from 3 March. On the same occasion, the discount and current-account rates were raised from 2.25 per cent to 2.50 per cent. These increases were expected in the market.

Prior to the increase in March, a number of banks and mortgage-credit institutes deposited large sums in their current accounts at Danmarks Nationalbank. Since the total current-account limit was hereby exceeded, kr. 9.1 billion of the total current-account deposit was converted into certificates of deposit. The total limit is approximately kr. 25 billion, broken down into current-account limits for the individual monetary-policy counterparties, cf. Box 2 of Danmarks Nationalbank's Report and Accounts 2005. The purpose of Danmarks Nationalbank's current-account-limit system is to prevent the monetary-policy counterparties from building up large current-account deposits that may be used for speculation in interest- and exchange-rate changes.

INSTITUTIONAL INVESTORS' PURCHASES OF FOREIGN SECURITIES	Box 2
The institutional investors manage substantial assets, mainly on behalf of the households. At end-2004 the assets of the institutional investors (including insurance companies, pension funds, mutual funds, ATP (the Labour Market Supplementary Pension Fund) and LD Pensions) thus exceeded kr. 2,200 billion. Growth in the institutional investors' assets can in principle be attributed to the households' net pension contributions, net placements with mutual funds and value adjustments. The growth in assets, excluding value adjustments, gives an indication of the institutional investors' new placement requirements. In the period 2000-2004 the figure fluctuated between kr. 80 and 190 billion annually, cf. the Chart. While the insurance and pension sector's placement requirement has been relatively stable at kr. 50-70 billion, the net payments to mutual funds have varied somewhat more. Pension contributions have exceeded disbursements throughout the period covered by statistics since 1995, which has led to a substantial placement requirement for the insurance and pension sector. Net pension contributions are a natural element of building up labour-market pensions and will continue for many years to come. There is no equivalent guarantee that net contributions to mutual funds will also continue to be positive. Factors such as cyclical developments and the prices of financial assets can be expected to influence net savings in mutual funds.
INSTITUTIONAL INVESTORS' PLACEMENT REQUIREMENTS
Note: The households' net assets in life-insurance and pension-fund reserves and other financial intermediaries' issued shares and other equities, including investment certificates (consolidated). Source: Statistics Denmark, financial items of the national accounts.
The institutional investors place their investments in both Danish and foreign assets in order to optimise returns, taking into account the risk, as well as the statutory rules to which the institutional investors are subject. In recent years, foreign bonds have made up an increasing share of the institutional investors' total portfolio of bonds. Foreign equities as a ratio of total equities was on the increase until 2000, but fell back somewhat in 2002. At end-2005, foreign securities accounted for around 1/3 of the institutional investors' total portfolios of both equities and bonds. In 2005, purchases of foreign equities reached almost the same level as in 2000, cf. the Chart. The Danish stock market generally saw larger price increases than e.g. the euro area in the first part of 2005, which may have caused some investors to turn to foreign markets with more potential. In the 1st quarter of 2006 institutional investors purchased foreign equities for kr. 38 billion net, which is the largest quarterly net purchase since 1999. The institutional investors' net purchases of foreign bonds were also considerable in 2005, cf. the Chart. This should be viewed against the background of a narrowing of the 10-year yield spread between Denmark and Germany from around 20 basis points in the autumn of 2004 to zero in May 2005. In the 1st quarter of 2006, the institutional investors resold foreign bonds for kr. 46 billion net, while at the same time the 10-year yield spread to the euro area again became positive.
INSTITUTIONAL INVESTORS' PURCHASES OF FOREIGN EQUITIES AND BONDS, NET
Note: The most recent observations are from March 2006. Institutional investors comprise other financial intermediaries, etc. (including mutual funds) and insurance companies and pension funds (including ATP from January 2005). The general government sector – social pension funds is included until December 2004 since ATP was previously placed in this sector. Source: Danmarks Nationalbank.
The impact of the institutional investors' purchases of foreign securities on the foreign-exchange market for Danish kroner depends on the extent to which the exchange-rate risk is hedged. No readily available statistics exist for the investors' hedging of exchange-rate risk on foreign portfolio investments. Previous empirical analyses have, however, indicated that purchases of foreign equities have a greater impact on the krone than purchases of foreign bonds.1 One reason may be that the exchange-rate risk for equities is hedged to a smaller degree than for bonds.
1 See Jakob Lage Hansen and Peter Ejler Storgaard, Capital Flows and the Exchange Rate of the Krone, Danmarks Nationalbank, Monetary Review, 2nd Quarter 2005.

In March, the institutional investors sold foreign bonds in favour of Danish bonds, while purchases of foreign equities continued, cf. Box 2. Danmarks Nationalbank did not intervene in the foreign-exchange market in March, and intervention is April was also extremely limited. At end-April the foreign-exchange reserve was kr. 182.4 billion.

Short-term interest rates have followed the development in Danmarks Nationalbank's official interest rates. In mid-May the uncollateralised 3-month Danish money-market rate was around 2.9 per cent, against 2.5 per cent at the beginning of 2006. Adjusted for differences in maturities, the yield spread between a 10-year Danish government bond and an equivalent German government bond was around 8 basis points in mid-May.

THE DANISH ECONOMY

The upswing in the Danish economy has continued, with strong growth in investments and high consumption. Unemployment has fallen at a surprising rate in the last few months, to the lowest level for many years. This development has pushed up the surplus on government
finances, while the current-account surplus has diminished compared to 2005. Both price and wage increases have been moderate considering the strong growth.

Economic activity and the balance of payments
In the 4th quarter of 2005, GDP in constant prices was by and large unchanged from the preceding quarter. This stagnation should be viewed against the very high growth rates in the 2nd and 3rd quarters of 2005. Compared with the preceding year, GDP grew by 3.4 per cent in the 4th quarter. The dampened growth in the 4th quarter of 2005 reflected, among other things, a significant drop in the Danes' consumption of services, primarily related to lower expenditure on tourism by households. On the other hand, retail turnover was very strong in the 4th quarter, and both retail turnover and car sales rose a little further in the 1st quarter 2006. Consumer confidence has been riding high in recent months.

The economic upswing has had a powerful impact on investments, and the high year-on-year growth in GDP in the 4th quarter of 2005 was to a large extent attributable to an increase in fixed gross investments by more than 10 per cent.

Investments in residential construction were around 12 per cent higher in the 4th quarter of 2005 than in the previous year. The strong development in construction has continued into 2006 and is e.g. reflected in rising output expectations and a shortage of labour in many enterprises.

Manufacturing output also increased in the first three months of 2006. At the same time export orders rose, while orders from the domestic market were lower than in the 4th quarter of 2005. The confidence indicator for April pointed to a slight downturn in industrial expectations, but also to a shortage of labour in a number of enterprises.

The strong growth in consumption and investments was reflected in the activities of the banks and mortgage-credit institutes. Lending continued to rise strongly in the first four months of 2006, cf. Chart 8. The ratio of deferred-amortisation mortgage-credit loans increased to around one third of total mortgage-credit lending for owner-occupied housing and summer cottages. The ratio of capped loans has also been increasing. The substantial expansion of lending coincided with
increased growth in deposits.

The balance of payments showed a deficit of almost kr. 6 billion in the 1st quarter of 2006, compared with a surplus of kr. 2.4 billion in the same quarter of 2005. The trade surplus increased slightly in the first months of 2006, but if energy is omitted, it declined, cf. Chart 9. This primarily reflects the strong growth in domestic demand, which boosted imports of commodities, investment goods and goods and services for consumption. The weaker balance of payments also reflects a number of special conditions. Imports linked to exports of sea freight thus rose
significantly, but this increase is not considered to be permanent. Export trends have generally been positive as a result of stronger growth in many European countries.

In March 2006, Danmarks Nationalbank published a revised compilation of Denmark's external assets and liabilities^[2]. At the end of the 4th quarter of 2005, net assets totalled kr. 36 billion. Denmark's external account reached balance in the 2nd quarter of 2005. This is the first time since World War II that Denmark does not have net foreign debt, cf. Chart 10.

Inflation and the labour market
Despite the strong economic upswing and an increasingly tighter labour market, cf. below, both wage and price increases have been moderate so far. As yet, no wage statistics are available beyond 2005, but in the 4th quarter of 2005 wage increases in the private sector were 2.9 per cent against the previous year. In the building sector, where the shortage of labour is most pronounced, the increases were a little higher. However, the assessment of the wage increases is subject to some uncertainty. The detailed structural statistics from the Confederation of
Danish Employers for the full year 2005 point to slightly higher increases than the business cycle statistics, i.e. 3.6 per cent against 2.8 per cent. The difference is partly attributable to " irregular payments" that may reflect the favourable cyclical position.

An increasing number of work permits have been granted to jobseekers from the eastern European countries that joined the EU in May 2004, cf. Chart 11. The largest group is employed in agriculture, horticulture and forestry. The number employed in the building and construction sector is smaller, but definitely on the increase. In relation to total employment of approximately 150,000 in this sector, employees from the new EU member states still constitute a small share. In addition to those employed by Danish construction enterprises, there are around 1,700 people working in Denmark for eastern European building and construction companies^[3]. The political agreement laying down the framework for employment of labour from the new EU member states was revised in April 2006. A number of amendments have made it easier to recruit labour from these member states.

Consumer prices have continued to rise by just under 2 per cent, in spite of the high oil prices. In April 2006, the harmonised index of consumer prices was 1.8 per cent higher than one year before. Inflation was thus somewhat lower than in the euro area, where the equivalent index rose by 2.4 per cent. Core inflation, calculated as the increase in consumer prices less energy and unprocessed food, also remains lower than in the euro area. In April, core inflation in Denmark was 1.0 per cent against the preceding year. Domestic market-determined inflation, IMI, which reflects the development in Danish wage costs and profits on goods and services for private consumption, is marginally negative^[4]. This presumably reflects that the rising energy and commodity prices have not passed through fully to consumers, i.e. business enterprises have initially accepted falling unit profits as commodity prices have risen. The strong activity and consequential high capacity utilisation ensure a generally good level of corporate earnings.

The strong price increases in the housing market continued unabated in the 1st quarter of 2006. Prices for single-family and terraced houses were 24 per cent higher than one year before. The soaring prices are attributable to rising real incomes in recent years, the rapid decrease in unemployment, low inflation and sustained low interest rates. In addition, there is an impact from the new loan types, as well as the tax freeze, whereby the nominal property taxes have been frozen so that rising housing prices do not push up property taxes. Looking ahead, the rising interest rates since the turn of the year will dampen price developments.

There are no indications that the capital gains in the housing market have gone to consumption to any large extent. The growth in private consumption has not been much stronger than the development in disposable real incomes. Capital gains in the housing market have chiefly been reflected in increasing wealth.

Unemployment is at its lowest level for many years. The low level in itself is a great advantage, made possible by labour-market reforms in recent years. This development will make it realistic to bring some of the so far marginalised groups into employment. However, the low rate of unemployment also entails certain elements of risk. Enterprises have begun to compete for labour by offering higher wages, and there are signs of general bottlenecks in the financial sector and especially in the building and construction sector, where unemployment has reached an unusually low level in 2006, cf. Chart 12. If these tendencies are amplified and spread to other sectors, there is a genuine risk of jeopardising the competitiveness of Danish enterprises. That would have serious implications for production and employment in competitive sectors and thus generally weaken the outlook for future prosperity.

The fall in unemployment in recent months has been surprisingly strong, cf. Chart 13, which shows estimates from Danmarks Nationalbank's internal cyclical analyses from September and December 2005 compared with the actual development. In March, unemployment was down to 4.8 per cent of the labour force^[5].

The risk of upward pressure on Danish wages and prices is by all appearances increasing. The requirements of economic policy should be seen in this perspective. In this context it is important to note that short-term interest rates in Denmark are determined by exchange-rate-policy considerations and that the tax freeze limits the scope for economic policy. In the current situation it is therefore extremely important to keep a tight rein on government expenditure.