CHAPTER 1
The Monetary- and Foreign-Exchange-Policy Instruments
As the Danish central bank Danmarks Nationalbank is responsible for monetary policy in Denmark. Danmarks Nationalbank conducts monetary policy by setting the monetary-policy interest rates, i.e. the discount rate, the current-account rate and the lending rate (equal to the rate of interest for certificates of deposit). Danmarks Nationalbank's interest rates guide the short-term interest rates in the Danish money market, as well as the deposit and lending rates that the banks offer customers.
Denmark maintains a fixed-exchange-rate policy vis-à-vis the euro. This means that the objective of monetary and foreign-exchange policy is to keep the krone stable against the euro. Other aspects than the exchange rate – e.g. cyclical developments in Denmark – are not considered in relation to monetary policy.
The formal framework for the fixed-exchange-rate policy is the European Exchange Rate Mechanism, ERM II. Denmark participates at acentral rate of kr. 746.038 per 100 euro and with a fluctuation band of +/- 2.25 per cent. In recent years the krone rate has remained close to the central rate.
Danmarks Nationalbank can influence the krone rate by changing its monetary-policy interest rates. When Danmarks Nationalbank tightens monetary policy, i.e. raises the monetary-policy interest rates, the krone tends to strengthen since it is more attractive to place funds in kroner at the higher rate of interest. When monetary policy is eased, the opposite effect is seen. Danmarks Nationalbank can also keep the krone stable in the short term by intervening in the foreign-exchange market. When Danmarks Nationalbank sells foreign currency (and buys kroner), the krone will tend to strengthen. When Danmarks Nationalbank buys foreign currency (and sells kroner), the krone will tend to weaken.
In practice Danmarks Nationalbank conducts its monetary policy via the monetary-policy counterparties, i.e. the banks and mortgage-credit institutesinDenmark.DanmarksNationalbankisbankertothe monetary-policy counterparties. In this capacity Danmarks Nationalbank holds accounts for the counterparties and manages the settlement of their mutual payments. Within certain limits, the counterparties can make demand deposits with Danmarks Nationalbank and participate in the weekly market operations, where the counterparties can obtain 14-day loans by pledging securities as collateral, or make 14-day deposits by purchasing certificates of deposit. Deposits with and loans from Danmarks Nationalbank accrue interest at the monetary-policy interest rates.
1.1 Danmarks Nationalbank is banker to the banks
Danmarks Nationalbank is banker to the banks and mortgage-credit institutes. Banks and mortgage-credit institutes – the monetary-policy counterparties – can hold interest-bearing current accounts at Danmarks Nationalbank. These accounts play a key role in monetary policy and payment systems in Denmark:
- Danmarks Nationalbank's lending to and deposits from the monetary-policy counterparties are settled via the counterparties' current accounts.
- Danmarks Nationalbank's other transactions with the counterparties, including foreign-exchange transactions, are likewise settled via the current accounts.
- The current accounts are the backbone of Danmarks Nationalbank's payment system, Kronos, where very large daily liquidity transfers between the counterparties take place.
- Payments to and from the central government are also settled via the current accounts.
The historical background to Danmarks Nationalbank's role as banker to the banks is that Danmarks Nationalbank holds the sole right to issue banknotes. Danmarks Nationalbank was approached when new banknotes were required, and one of Danmarks Nationalbank's most important tasks was to ensure an "elastic" supply of banknotes, e.g. a substantial circulation when economic activity was high.
The issue of banknotes plays no part in monetary policy today. It is easier, cheaper and safer to handle large transactions electronically rather than using physical banknotes and coins, and for the counterparties there is no advantage from holding large quantities of non-interest-bearing banknotes and coins. Nowadays banknotes are primarily used as a means of payment for households on a day-to-day basis, but also for savings purposes to some extent.
Today the role of banker to the banks is closely linked to Danmarks Nationalbank's function as intermediary between the participants in the payment system. The participants accept that claims on Danmarks Nationalbank are risk-free and liquid. This means that claims on Danmarks Nationalbank can always be used to settle accounts between the counterparties or between the counterparties and Danmarks Nationalbank.
It is still a key task for Danmarks Nationalbank to ensure an "elastic" supply of liquidity so that there is always sufficient liquidity in the overall banking system. Ensuring the required liquidity can be divided into two closely related functions:
- Monetary-policy function: ensuring that there is sufficient liquidity in the overall banking system at the close of the day when the counterparties' accounts with Danmarks Nationalbank are settled.
- Payment-system function: ensuring that sufficient liquidity is available to the banking system in the course of the day.
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Danmarks Nationalbank conducts its monetary policy via the monetary-policy counterparties, comprising banks and mortgage-credit institutes in Denmark. Variations in the quantity of banknotes and coins are of no significance to monetary policy. |
1.1.1 Monetary Policy
The monetary-policy counterparties' aggregate accounts with Danmarks Nationalbank in relation to monetary policy are stated on Danmarks Nationalbank's balance sheet and are termed the "net position" vis-à-vis Danmarks Nationalbank.
Danmarks Nationalbank makes available two facilities that give the monetary-policy counterparties the opportunity to earn interest on their net position:
- Firstly, the counterparties have access to make current-account deposits with Danmarks Nationalbank within certain limits. The current account may not be overdrawn overnight. Current-account deposits accrue interest at the current-account rate.
- Secondly, Danmarks Nationalbank conducts market operations whereby the counterparties can borrow or place funds, usually for 14 days. Danmarks Nationalbank conducts its market operations by purchasing and selling certificates of deposit or by lending against collateral in the form of securities. The lending rate is equal to the rate of interest for certificates of deposit, and usually there is no limit to the amounts that the counterparties may borrow or place.
At end-2002 the net position was e.g. composed as follows:
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Kr.billion
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| Current-account deposits |
10.1
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| + Certificates of deposit (maturity up to 14 days) |
160.7
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| - Monetary-policy lending by Danmarks Nationalbank (maturity up to 14 days) |
81.2
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| = Counterparties' net position vis-à-vis Danmarks Nationalbank |
89.6
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The key liquidity concept in monetary policy is the counterparties' current-account deposits, since these funds can immediately be used as means of payment at the initiative of the account holders themselves. Current-account deposits are therefore often referred to as "liquidity", "current-account liquidity" or "krone liquidity".
Overall, the monetary-policy counterparties do not have access to more liquidity than has been provided via Danmarks Nationalbank. The counterparties may trade liquidity with each other, but cannot themselves create liquidity, cf. Box 1.1.
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Box 1.1 |
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The banks and mortgage-credit institutes (the monetary-policy counterparties) cannot themselves create liquidity; they only have access to the liquidity provided via Danmarks Nationalbank. This can be illustrated via the two examples below. In example A, the counterparties trade current-account liquidity among themselves. This does not generate any new liquidity. In example B, Danmarks Nationalbank purchases foreign exchange from the counterparties. This creates liquidity, since Danmarks Nationalbank's payment in kroner for the purchase is credited to the counterparties' current accounts.
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Since the counterparties may not have overdrafts on their current accounts at the close of the day, Danmarks Nationalbank provides liquidity if all counterparties taken as one show a liquidity deficit. This might be necessary if Danmarks Nationalbank's sale of foreign exchange (and purchase of kroner), or the private sector's payments to the central government, lead to an aggregate liquidity deficit. Danmarks Nationalbank will always – via its market operations – ensure that the aggregate current-account funds are sufficient to prevent overdrafts at the close of the day. On the other hand, if the total limit for current-account deposits is reached, Danmarks Nationalbank will issue certificates of deposit.
Danmarks Nationalbank conducts monetary policy by setting the monetary-policy interest rates, i.e. the discount rate, the current-account rate and the lending rate (equal to the rate of interest for certificates of deposit). The interest rates are determined by the Board of Governors of Danmarks Nationalbank, and can be changed as required at any time.
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Danmarks Nationalbank's monetary-policy interest rates are the discount rate, the current-account rate and the lending rate (equal to the rate of interest for certificates of deposit). The monetary-policy interest rates guide the short-term money-market interest rates. When the discount rate is changed, the banks often change their customer rates. |
Danmarks Nationalbank's interest rates guide the short-term money-market interest rates in Denmark, cf. Chart 1.1. As a resultofthecompetition among the banks in the long term, changes to the banks' deposit and lending rates tend to match larger changes to the discount rate relatively closely, cf. Chart 1.2. This reflects that borrowing from Danmarks Nationalbank or via the money market constitutes a potential marginal source of financing for the individual bank, cf. Chapter 3.
| Danmarks Nationalbank's lending rate and the money-market interest rate |
Chart 1.1
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| Source: Danmarks Nationalbank. | |
1.1.2 Payment System
Danmarks Nationalbank's role in the payment system is to be the settlement bank for the direct participants. As a consequence Danmarks Nationalbank provides intraday liquidity by permitting overdrafts on the participants' current accounts against collateral (securities or certificates of deposit).
The central liquidity concept in the payment system comprises the sum of current-account deposits and overdraft facilities. Access to intraday current-account overdrafts makes it unproblematic for the participants to settle payments arising at different times during the day. For instance, one bank may require to overdraw its current account at 9 a.m. in order to settle a bond purchase. Later in the day, when the bank receives due payment for transactions with another bank, the overdraft will be covered. Intraday movements in current-account deposits are not regarded as part of the monetary policy, but as settlement of payments.
The participants in the payment system are primarily Danish banks and mortgage-credit institutes. In addition there are certain other financial institutions that are not monetary-policy counterparties, e.g. stockbrokers.
All direct participants in the payment system hold current accounts with Danmarks Nationalbank. For participants that are not monetary-policy counterparties, any overnight deposits on these accounts do not accrue interest, which is in line with international practice in this area. The reason is that interest-bearing current-account deposits are one of the instruments used by Danmarks Nationalbank for conducting monetary policy. The group of counterparties with access to interest-bearing current-account deposits is therefore determined on a monetary-policy basis.
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The accounts of banks and mortgage-credit institutes with Danmarks Nationalbank are the central link in the payment system. Via these accounts the banks and mortgage-credit institutions settle large payment volumes among themselves. |
It is voluntary for a participant to hold a non-interest-bearing current account for settlement of payments. An alternative option is indirect participation in the payment system via other participants holding current accounts at Danmarks Nationalbank. Payment-system participants who do not hold interest-bearing current accounts can receive interest on their excess liquidity on an overnight basis in the private financial sector.
The difference between settlement of payments and monetary policy is illustrated in the example in Box 1.2.
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Box 1.2
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The following provides a slightly simplified example of the relationship between monetary policy and settlement of payments in Denmark. The example considers a single participant in the payment system. It is assumed that the participant is a monetary-policy counterparty and only holds one account with Danmarks Nationalbank for settlement of both payments and the monetary-policy instruments. During a monetary-policy day the account may be overdrawn against collateral, but overdrafts from one day to another are not permitted. The monetary-policy day runs from 4.00 p.m. to 3.30 p.m. on the following day. In other words, negative balances (overdrafts) are not permitted "overnight" in the period from 3.30 p.m. to 4.00 p.m. on the same day. The Chart below shows how the balance on the participant's account at Danmarks Nationalbank might develop over three monetary-policy days. |
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| Example of development in a counterparty's account at Danmarks Nationalbank | |
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The chart shows that during a monetary-policy day money is withdrawn from and deposited in the account when various payments are settled. Danmarks Nationalbank's payment system, Kronos, is open for payments in Danish kroner between 7.00 a.m. and 4.30 p.m., except between 3.30 p.m. and 4.00 p.m. when the counterparties' accounts with Danmarks Nationalbank are settled in connection with the start of a new monetary-policy day. Outside the opening hours movements in the deposit may only occur in connection with settlement of payments related to securities registered by VP Securities Services or in connection with the Sumclearing, cf. the description in Appendix 1.A. As the chart above illustrates, the individual participant's liquidity may fluctuate considerably during the day. If the participants in the system did not have access to overdraft facilities at Danmarks Nationalbank within a monetary-policy day, but had to settle such fluctuations among themselves, this would require considerable money-market transactions during the day, both in numbers and in volumes. Generally the overdraft facility makes the payment system more flexible, since it prevents situations where the individual participants in the payment system do not have sufficient liquidity on the central-bank account to settle payments as required. This reduces the risk of queues and delayed settlement of payments. |
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Settlement via Danmarks Nationalbank facilitates the functioning of the payment system, and no interest is charged for intraday credit at Danmarks Nationalbank. It is the prevailing convention in Denmark and in most other countries that the minimum unit for accrual of interest is one day.[1]
Danmarks Nationalbank's primary role in relation to the krone-denominated payment system is to be the settlement bank for the following systems:
- Kronos, which is Danmarks Nationalbank's payment system where banks and a few other participants mutually settle e.g. large-value payments (wholesale payments) such as money-market transactions and transfer of special-term deposits.
- Sumclearing, which is a payment system where e.g. retail payments are settled between banks. Such payments include cheques, Dankort (debit card) transactions and transfers via BetalingsService (direct debit).
- The VP System, which is VP Securities Services' system for settlement of trades and other payments (e.g. interest and repayments) in connection with securities registered with VP Securities Services.
A more detailed description of Danmarks Nationalbank's role in relation to the payment system is provided in Appendix 1.A.
1.2 The fixed-exchange-rate policy
Denmark has maintained a consistent fixed-exchange-rate policy since the early 1980s. The monetary policy is designed to keep the krone stable vis-à-vis the euro, cf. Chart 1.3, and other aspects than the exchange rate – e.g. the cyclical development in Denmark – are not considered in relation to monetary policy. Before the introduction of the euro at the beginning of 1999, the Danish fixed-exchange-rate policy was oriented towards the D-mark.[2]
The primary monetary-policy objective in the euro area is to keep inflation below and close to 2 per cent. By keeping the krone stable vis-à-vis the euro, a basis for low inflation is also created in Denmark, cf. Chapter 4.
The formal framework for the Danish fixed-exchange-rate policy is the European Exchange Rate Mechanism (ERM II), cf. Box 1.3.[3] Denmark participates in ERM II with a central rate of kr. 746.038 per 100 euro and a fluctuation band of +/- 2.25 per cent.In recent years the krone has been close to the central rate.
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Box 1.3
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Since the start of the third stage of Economic and Monetary Union (EMU) in the EU on 1 January 1999, Denmark has participated in the European Exchange-Rate Mechanism, ERM II, which replaced the Exchange-Rate Mechanism of the European Monetary System (EMS). In ERM II a bilateral central rate is fixed for the currency of each participating country vis-à-vis the euro. For each currency the standard fluctuation band for the bilateral exchange rate vis-à-vis the euro is +/- 15 per cent around the central rate.1 Under the ERM II agreement it is, however, possible to negotiate a narrower band. If the currency of a participating country reaches the upper or lower limit of the ERM II fluctuation band, both the ECB and the central bank of the country in question must buy the weak currency and sell the strong one to ensure that the exchange rate remains within the fluctuation band. The ECB and the national central bank may suspend intervention if it is in conflict with maintaining price stability. ERM II allows for changes in the central rates. Decisions relating to central rates and the standard fluctuation band require agreement between the ministers from the euro-area member states, the ECB and the ministers and central-bank governors of the non-euro-area member states participating in ERM II. ERM II is based on the participating countries managing their currencies vis-à-vis the euro so that exchange-rate adjustments are the exception, but not the rule. This requires responsible economic policies (including fiscal policy), which are in line with the agreed exchange-rate relations. Denmark participates in ERM II at a central rate of 746.038 kroner per 100 euro. The central rate is a conversion of the central rate of the krone vis-à-vis the D-mark in the previous European Exchange-Rate Mechanism (ERM). The central rate of the krone vis-à-vis the D-mark in ERM was last changed on 12 January 1987. Owing to its high degree of economic convergence with the euro area as a result of sustained stability-oriented economic policies, Denmark has been able to enter into an agreement for a narrow fluctuation band of +/- 2.25 per cent. This entails that the margins for the krone are kr. 762.824 per 100 euro and kr. 729.252 per 100 euro. In recent years the exchange rate of the krone has remained stable close to the central rate. The ERM II system entails that the ECB and the central bank of the participating country may grant each other unlimited intervention credit with an initial maturity of up to 3 months for intervention at the margin. Interest is charged on the credit, which may be extended. This ensures that Denmark's foreign-exchange reserve does not constitute the upper limit for intervention to support the krone. Normally a weakening of the krone initially leads to an increase in interest rates in Denmark. Since the krone has remained close to its central rate throughout the lifetime of ERM II, intervention credits have not been required so far. ERM II has thus acted as a safety net which has not been used. In the period from 2001 up until now (early June 2003) Denmark has been the only participant in ERM II. With the enlargement of the EU in 2004 more countries can gradually be expected to join. Under the Treaty, one of the convergence criteria for participation in the euro is "the observance of the normal fluctuation margins provided for by the exchange-rate mechanism of the European Monetary System, for at least two years, without devaluing against the currency of any other Member State"2. |
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| 1 The euro is thus at the centre of the ERM II since the participating currencies have central rates vis-à-vis the euro, but not vis-à-vis each other as they did in the European Exchange-Rate Mechanism (ERM) which applied before stage three of EMU. ERM II is often referred to as a "hub and spokes" model. The ERM II is described in more detail in Køhler and Thuesen (1997) and Danmarks Nationalbank (1998). 2 Article 121 of the Treaty establishing the European Community. |
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The krone's stabilisation is not just a result of Danmarks Nationalbank's interventions in the foreign-exchange market and Danmarks Nationalbank's interest-rate changes. It is attributable first and foremost to the behaviour of the market participants. In the foreign-exchange market, market participants take positions in the expectation of a stable krone rate, and thereby contribute to stabilising the krone.
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Denmark maintains a fixed-exchange-rate policy vis-à-vis the euro. The central rate is kr. 746.038 per 100 euro. The fluctuation band for the krone vis-à-vis the euro is +/- 2.25 per cent. In recent years the krone has been stabilised close to the central rate. |
Danmarks Nationalbank can influence the krone rate by changing its monetary-policy interest rates. When the foreign-exchange market is stable, Danmarks Nationalbank normally changes its interest rates in step with the changes of the European Central Bank's minimum bid rate, cf. section 1.4. In a situation with upward or downward pressure on the krone or a sustained inflow or outflow of foreign currency, Danmarks Nationalbank independently changes its interest rates in order to stabilise the krone. Prior to the introduction of the euro in 1999, the spread between the monetary-policy interest rates in Denmark and Germany was key to the Danish monetary policy and the krone rate.
When Danmarks Nationalbank tightens its monetary policy and increases the spread between the monetary-policy interest rates in Denmark and the euro area, the krone will tend to strengthen. This is because it is more attractive to place funds in kroner and more expensive to borrow in kroner when the rate of interest is higher in Denmark than in the euro area. When monetary policy is eased, the opposite tendency is seen.
Chart 1.4 shows the spread between the monetary-policy interest rates in Denmark and the euro area up to the end of 2002 (before 1999 the spread between the monetary-policy interest rates in Denmark and Germany). The Chart illustrates clearly how the spread widens in situations with unrest or uncertainty in the foreign-exchange markets – cf. the periods 1992-93, 1995, 1998 and 2000 – and then gradually narrows once the situation has calmed down.
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Danmarks Nationalbank can keep the krone stable vis-à-vis the euro via its monetary-policy interest rates. In the short term the krone rate may also be influenced by the purchase and sale of foreign exchange against kroner. |
In the short term Danmarks Nationalbank can influence the krone rate by intervening in the foreign-exchange market by selling or purchasing foreign currency against kroner. When Danmarks Nationalbank sells foreign currency (and buys kroner), the krone will tend to strengthen. When Danmarks Nationalbank buys foreign currency (and sells kroner), the krone will tend to weaken. If Danmarks Nationalbank has regularly purchased (sold) foreign currency for a long period of time, this indicates that the interest spread between Denmark and the euro area is too wide (narrow), and consequently Danmarks Nationalbank independently changes its interest rates in relation to the ECB.
Chart 1.5 shows the volume of interventions since 1987. Some of the large interventions during the currency unrest in 1993 were made by other central banks to support the krone under the European Exchange Rate Mechanism (ERM) existing at that time. In the period from mid-1993 to date (early June 2003) the interventions have been made solely by Danmarks Nationalbank within the fluctuation band (intramarginal intervention, cf. section 1.6).
The free movement of capital and the greater international diversification of Danish and foreign investors' portfolios are reflected in Danmarks Nationalbank's intervention purchases and sales of foreign exchange. Even when the currency markets are calm intervention amounts may reach a size previously only seen in connection with actual currency crises.
Box 1.4 outlines a concrete example from the autumn of 1998 of Danmarks Nationalbank's use of intervention and interest-rate changes in order to manage the krone rate.
1.3 The monetary-policy instruments
In practice Danmarks Nationalbank conducts monetary policy via the "monetary-policy instruments". This term covers the facilities used by DanmarksNationalbanktomanageandservice accounts with the monetary-policy counterparties (i.e. the banks and mortgage-credit institutes).
Danmarks Nationalbank's monetary-policy instruments have generally remained unchanged since 1992.[4] The monetary-policy counterparties have access to two facilities:
- Overnight current-account deposits. A ceiling has been placed on the counterparties' total current-account deposits at the close of the day. This ceiling is implemented as individual current-account limits for the counterparties.
- Weekly market operations whereby the monetary-policy counterparties either borrow against securities as collateral (monetary-policy loans) or make placements by purchasing certificates of deposit. These transactions usually have a maturity of 14 days.
The rates of interest on the two types of 14-day transactions are normally identical and known as respectively the lending rate and the rate of interest for certificates of deposit. Current-account deposits accrue interest at the current-account interest rate, which is lower than the lending rate, cf. Chart 1.6. In the period from April 1992 to date (early June 2003) the current-account interest rate has been equal to the discount rate.
| Danmarks Nationalbank's monetary-policy interest rates |
Chart 1.6
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| Note: Throughout the period shown the current-account interest rate has been equal to the discount rate. | |
| Source: Danmarks Nationalbank. | |
None of the monetary-policy instruments directly accrue interest at the discount rate. The discount rate is rather a signal rate indicating the overall level of the monetary-policy interest rates.
Danmarks Nationalbank's interest rates guide the short-term money-market interest rates in Denmark. A change in the discount rate normally entails that the banks change the interest rates offered to most customers. Danmarks Nationalbank's lending rate (and the rate of interest for certificates of deposit) is usually changed more frequently and in smaller steps than the discount rate. In brief periods of currency unrest Danmarks Nationalbank may thus choose to increase its lending rate without changing the discount rate. This mainly affects money-market interest rates, capital movements and the krone rate, while the interest rates offered by banks to retail customers are to some extent protected, cf. Chapter 3.
Danmarks Nationalbank regularly publishes a wide range of data on the monetary-policy and foreign-exchange-policy instruments and their use, cf. the overview in Appendix 1.B.
1.3.1 Current-account deposits
Current-account deposits with Danmarks Nationalbank are demand deposits which the monetary-policy counterparties may use as means of payments without notice and at their own initiative.
The current-account deposits of the monetary-policy counterparties accrue interest at the current-account interest rate, which is an overnight interest rate, i.e. a rate of interest on one-day deposits. The current-account rate is usually the lowest overnight rate in the money market. The reason is that for a monetary-policy counterparty placement on a current account with Danmarks Nationalbank always represents an alternative to lending via the money market, provided that the overall ceiling on current-account deposits has not been exceeded. The very short-term money-market interest rate has only fallen slightly below the current-account rate in extraordinary cases, cf. Chart 1.7. Furthermore, the overnight interest rate in the money market will tend to be close to the current-account rate. This reflects the fact that current-account deposits with Danmarks Nationalbank are the only way that the monetary-policy counterparties taken as one can earn interest on excess krone liquidity outside the weekly market operations.
| Danmarks Nationalbank's current-account interest rate and the overnight interest rate in the money market |
Chart 1.7
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| Note: The overnight money-market interest rate applied is an uncollateralised overnight interest rate up to and including end-1997. After that, it is the uncollateralised turnover-weighted T/N interest rate. | |
| Source: Danmarks Nationalbank. | |
The overnight interest rate fluctuates somewhat, partly reflecting the fluctuations in the total current-account deposits. The counterparties do not have access to overnight loans from Danmarks Nationalbank, and in principle Danmarks Nationalbank only provides liquidity via the regular weekly market operations on the last banking day of the week. It is deemed to be important to a well-functioning money market that the counterparties trade liquidity among themselves on market terms. Danmarks Nationalbank's foreign-exchange transactions and the central government's payments in kroner will therefore initially be reflected in the current-account deposits. Fluctuations in the supply and distribution of liquidity will impact the overnight interest rate. Counterparties with positive current-account deposits will seek to gain a profit by lending to other counterparties that are short of liquidity. The lower the level of total current-account deposits, the higher the interest rate is normally on very short-term lending in the money market.
Fluctuations in the overnight interest rate may also occur for more technical reasons, cf. Box 1.5. Such fluctuations do not affect the more long-term money-market interest rates, which are the most important in relation to capital movements and the krone rate, and which are therefore in focus of the monetary policy.
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Box 1.5
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The overnight interest rate in the money market on the first four banking days of the week will tend to be close to the current-account interest rate. The reason is that for the counterparties taken as one current-account deposits with Danmarks Nationalbank constitutes the only opportunity to gain interest on excess krone liquidity on these days. On the last banking day of the week, when Danmarks Nationalbank is open for sale of certificates of deposit, counterparties with excess liquidity may – in addition to making current-account deposits – purchase certificates of deposit and thereby place liquidity with Danmarks Nationalbank at the rate of interest for certificates of deposit, which is higher than the current-account interest rate. If they instead choose to lend the liquidity on an overnight basis in the money market on the last banking day of the week, it should be taken into account that during the first four banking days of the following week the liquidity can only be expected to be re-placed in the money market at a rate of interest close to the current-account interest rate (or with Danmarks Nationalbank at the current-account interest rate). The overnight interest rate on the last banking day of the week (which also applies during the weekend) must therefore be relatively high to give a counterparty with excess liquidity an incentive to lend in the overnight market rather than purchase certificates of deposit from Danmarks Nationalbank. |
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This leads to the "high weekend interest rates" that are very apparent from the Chart, which shows the overnight interest rate during a period in March 2002. In the period considered, the current-account interest rate was 3.25 per cent, and the rate of interest for certificates of deposit 3.55 per cent. If a market participant expects the overnight interest rate during the next week to be equal to the current-account interest rate from Monday to Thursday, and lending in the overnight market is to be just as profitable, over a week, as purchasing certificates of deposit, the overnight interest rate on the |
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Friday must be 3.95 per cent (since the expected interest receivable when lending in the overnight market can be approximated at 3.95 per cent for 3 days and 3.25 per cent for 4 days, i.e. 3.55 per cent on average, which is equal to the rate of interest for certificates of deposit). In the period considered, the Friday rate of interest did not quite reach this level, and the overnight interest rate was slightly higher than the current-account interest rate during the first four days of the weeks. This reflects the fact that – in addition to the technical conditions relating to the spread between the rate of interest for certificates of deposit and the current-account interest rate – the overnight interest rate in the money market also depends on supply of and demand for liquidity and the distribution of liquidity among the counterparties, cf. the body text. In addition, the overnight interest rate in the money market is normally expected to be slightly higher than the current-account interest rate due to the credit risk incurred when lending on an uncollateralised basis in the money market, rather than placing the liquidity with Danmarks Nationalbank. |
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Current-account deposits are liquidity which the banks and mortgage-credit institutes can use as a means of payment without notice and at their own initiative. The current-account interest rate sets the lower limit to the market rate for overnight liquidity. |
Danmarks Nationalbank's instruments do not set a direct upper limit for the overnight interest rate in the money market. In practice Danmarks Nationalbank will, however, always open for market operations if the total current-account deposits at the close of the day are very small, or if there is a direct risk of a current-account overdraft by the counterparties taken as one. The reason is that liquidity can only be created via Danmarks Nationalbank, which in turn ensures that the overall liquidity of the counterparties does not become negative. In this way the overnight interest rate is subject to an implicit ceiling.
Danmarks Nationalbank has introduced an overall ceiling (a limit) on the monetary-policy counterparties' current-account deposits at the close of the day (i.e. at the close of the monetary-policy day at 3.30 p.m.). A ceiling is thus imposed on the volume of overnight krone liquidity which the counterparties taken as one can obtain at their own initiative. The purpose of the current-account-limit system is to discourage the build-up of large current-account deposits which could be used to speculate in changes in interest and exchange rates.
The total limit is approximately kr. 20 billion, broken down as individual current-account limits for the counterparties. If the total limit isexceededatthecloseoftheday, deposits exceeding the individual limits
will be converted into certificates of deposit.Conversionisto the certificate with the longest remaining term to maturity in order to tie up excess liquidity for a certain period so that it cannot immediately be used for outright speculation.
The current-account-limit system only comes into force if the current-account deposit exceeds the total limit. The monetary-policy counterparties may exceed their individual limits, provided that the total limit is not exceeded. Deposits exceeding the individual limits also accrue interest at the current-account rate for as long as the overall current-account limit is not exceeded.
Via extraordinary operations in certificates of deposit Danmarks Nationalbank contributes to ensuring that the current-account limits do not present a problem in relation to the daily settlement of payments. If there are indications during the day that the current-account deposits at the close of the day will exceed the total current-account limit, Danmarks Nationalbank normally opens for sale of certificates of deposit. To date (early June 2003) it has therefore not been necessary to convert current-account deposits into certificates of deposit.[5]
The individual current-account limits are determined on the basis of the counterparties' size and activity in the money market. The limits are updated at intervals.[6]
1.3.2 Danmarks Nationalbank's market operations
Danmarks Nationalbank conducts its market operations via two instruments: monetary-policy loans against securities as collateral, and certificates of deposit issued by Danmarks Nationalbank. All other things being equal, the sale (purchase) of certificates of deposit reduces (increases) the current-account deposits, while monetary-policy lending increases the current-account deposits.
Both monetary-policy loans and certificates of deposit accrue interest at a 14-day rate which is higher than the current-account rate, typically 0.1-0.5 per cent higher, but there are no fixed rules. When Danmarks Nationalbank's 14-day rate is higher than the current-account rate, the counterparties are encouraged to limit their current-account deposits. The current-account limits also provide a ceiling over the counterparties' liquidity, thereby limiting the liquidity which the counterparties might at their own initiative use to speculate in changes in interest and exchange rates.[7]
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Box 1.6
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Danmarks Nationalbank's regular market operations are conducted once a week. In the regular market operations the monetary-policy counterparties distribute their net position on current-account deposits, certificates of deposit and loans against collateral so that they have sufficient overall liquidity on their current accounts to handle the expected liquidity fluctuations in the next week. Individual liquidity requirements during the week are settled in the money market since Danmarks Nationalbank does not permit overdrafts on the counterparties' current accounts at the close of the day at 3.30 p.m. The regular market operations usually take place on the last banking day of each week. Danmarks Nationalbank's sales of certificates of deposit takes place between 10.00 a.m. and 3.30 p.m., while loan transactions can be concluded between 10.00 a.m. and 1.00 p.m. The opening hours for monetary-policy lending are shorter than for certificates of deposit so that in periods of unrest in the currency markets Danmarks Nationalbank has a overview of the counterparties' aggregate liquidity situation well before the close of the monetary-policy day. In the regular market operations monetary-policy loans and certificates of deposit usually have a maturity of 14 days. At certain intervals Danmarks Nationalbank, however, gives the counterparties the option to buy both short-term (7-day) and long-term (14-day) certificates of deposit in order to even out any undesired differences in the size of the short-term and long-term series. Both monetary-policy loans and certificates of deposit are settled on the day of operation with immediate liquidity effect. The rate of interest on monetary-policy loans (the lending rate) is equivalent to the rate of interest for certificates of deposit, and there are no quantitative restrictions on the counterparties' purchases of certificates of deposit and conclusion of monetary-policy loans. The pledging of collateral in connection with monetary-policy loans is described in Appendix 1.C. At any given time there are always two outstanding series of certificates of deposit and two outstanding series of monetary-policy loans. Each series has a year and week number referring to the time when it matures (e.g. 03/24 for the certificate of deposit/monetary-policy loan which matured in week 24, 2003). When a loan transaction is entered into, the loan is debited to a loan account, and the proceeds are credited to the current account. When the loan transaction matures, the interest is debited to the loan account, after which the borrowed amount, including interest, is transferred from the current account to the loan account. The loan is due for repayment before Danmarks Nationalbank's payment system (Kronos) opens on the expiry date. When a certificate of deposit is purchased, the purchase price is withdrawn from the current account, while the nominal value of the certificate of deposit is registered on the certificate-of-deposit account. When the certificate of deposit matures, its nominal value is credited to the current account of the relevant counterparty before the opening hours, and the nominal value is debited to the certificate-of-deposit account. Certificates of deposit are zero-coupon paper where the interest on the certificates of deposit is the difference between the purchase price and the redemption price (par value). Notification of regular sale of certificates of deposit, conclusion of loan transactions and the rate of interest at which the transactions can be entered into usually takes place at 10.00 a.m. on the last banking day in the week via DN News (screen 11). |
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Danmarks Nationalbank conducts regular market operations once a week, cf. Box 1.6. Generally, the weekly market operations are to adjust the current-account deposits at Danmarks Nationalbank to make them sufficient to cover the counterparties' liquidity requirement during the coming week.
All other things being equal, the monetary-policy counterparties have a financial incentive to limit their current-account deposits since Danmarks Nationalbank's 14-day interest rates always exceed the current-account rate. When current-account deposits involve a certain interest-rate loss, this tends to imply that the total current-account deposits are sufficient, but that individual liquidity fluctuations during the week are settled via the money market. This supports the need for a well-functioning money market where the counterparties exchange liquidity among themselves on market terms, rather than trading directly with Danmarks Nationalbank.
Due to this construction, a need may arise for Danmarks Nationalbank to give access to extraordinary market operations during the week. If, for instance, a large payment to the central government is due, it may be necessary for Danmarks Nationalbank to supply extraordinary liquidity to the market in order to prevent the overall current-account deposits from dropping below zero. Via such operations liquidity is fine-tuned. The extraordinary market operations usually take place in certificates of deposit that can be sold or purchased with immediate liquidity effect, cf. Box 1.7.
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In Danmarks Nationalbank's weekly market operations the counterparties can obtain 14-day loans by pledging securities as collateral, or make 14-day deposits by purchasing certificates of deposit. Danmarks Nationalbank's 14-day interest rate is important to the more long-term money-market rates. |
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Box 1.7
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Danmarks Nationalbank's extraordinary market operations comprise sale and buy-back of certificates of deposit. In buy-backs of certificates of deposit Danmarks Nationalbank sets a premium on the certificate-of-deposit interest rate. The premium may be fixed or variable, e.g. related to a market interest rate. In the period from August 1997 up until now (early June 2003) all buy-backs of certificates of deposit have been with a premium of 0.05 per cent. In buy-backs of certificates of deposit a distinction is usually drawn between three types of operations:
Extraordinary liquidity absorption usually takes place via sale of certificates of deposit. No premium (or deduction) is applied to the rate of interest when certificates of deposit are sold in extraordinary operations. On the first banking day of the month Danmarks Nationalbank is usually open for sale of certificates of deposit as a result of large government disbursements. In addition to this operation, an average of 1-2 announced operations and 1 unannounced take place every month. |
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There is relatively strong day-to-day fluctuation in the net position, cf. Chart 1.8. The fluctuation is important to daily liquidity management, but is normally of no significance to monetary policy. A shift in the net position's sign does not in itself lead to changes in interest rates since the 14-day interest rates for certificates of deposit and monetary-policy loans are identical. This is also reflected in the fact that Danmarks Nationalbank does not have a target for the size or sign of the net position.
| The net position of the monetary-policy counterparties vis-à-vis Danmarks Nationalbank |
Chart 1.8
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| Source: Danmarks Nationalbank. | |
Box 1.8 shows one month's day-to-day fluctuations in the net position as a result of movements in the various factors affecting liquidity. The Box also illustrates how the fluctuations in the net position lead to fluctuations in the counterparties' use of the monetary-policy instruments.
| Use of the monetary-policy instruments in practice |
Box 1.8
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The Table below shows day-to-day changes in the net position during one month and the resulting fluctuations in the use of instruments.
Movements in the net position during the month were mainly attributable to the central government's payments and Danmarks Nationalbank's net foreign-exchange purchases, while fluctuations in the other items were small. On the instruments side it is seen that the regular weekly market operations (on Fridays) adjusted the liquidity so well that on 13 of the remaining 18 banking days in that month no further market operations were required. On these days the current accounts absorbed the fluctuations in the net position. On Monday, 21 January and Tuesday, 29 January buy-back of certificates of deposit had been pre-announced, while both buy-back and sale of certificates of deposit had been pre-announced on Wednesday, 2 January. On the first banking day of the month Danmarks Nationalbank is usually open for sale of certificates of deposit as a result of large government disbursements, but on 2 January Danmarks Nationalbank also chose to be open for buy-back of certificates of deposit, inter alia as a result of large regular payments on mortgage-credit bonds on that day. On two occasions it was necessary to conduct unannounced operations in certificates of deposit. On 7 January the liquidity-absorbing effect of the government finances was larger than expected. Consequently, the counterparties' current-account deposit became low, and since it was distributed among many counterparties Danmarks Nationalbank chose to provide a small amount of liquidity by buying back short-term certificates of deposit. On 31 January an unannounced sale of certificates of deposit took place, following Danmarks Nationalbank's purchase of foreign exchange in excess of kr. 6 billion over three days and a resulting increase in the counterparties' current-account deposit. Without operations on the part of Danmarks Nationalbank, the total current-account deposit would have been very close to the overall current-account limit of approximately kr. 20 billion. |
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As Box 1.8 shows, a large part of the day-to-day fluctuations in the net position relate to central-government payments. To facilitate the monetary-policy counterparties' liquidity planning, Danmarks Nationalbank therefore regularly publishes forecasts of central-government payments, cf. Appendix 1.B. At the same time Danmarks Nationalbank publishes dates for its planned purchase and sale of certificates of deposit.
Certificates of deposit can be traded among the monetary-policy counterparties, but cannot be negotiated outside their circle. Trading in certificates of deposit among counterparties does not affect the counterparties' total liquidity, but may be used to exchange liquidity without credit risk for settlement on the same day. The volume of trading in certificates of deposit among counterparties has, however, so far been relatively modest compared with the total transaction volume in the money market, cf. the figures in Chapter 2.
Under normal circumstances managing the liquidity volume does not play a role in monetary policy. In principle there is therefore no limit to the counterparties' build-up of gross assets and liabilities vis-à-vis Danmarks Nationalbank – and since the lendingrateand therate of interest for certificates of deposit are identical, any such gross build-up does not entail interest costs for the counterparties. In practice the counterparties' demand for loans and certificates of deposit depends primarily on the net position. Even if the latter is negative, the counterparties will require a certain volume of certificates of deposit since selling back certificates of deposit is the only way to obtain liquidity during the week for the counterparties taken as one, provided that Danmarks Nationalbank is prepared to buy back certificates of deposit.
Within the framework of the monetary-policy rules applying at any time, Danmarks Nationalbank always reserves the right to change the "rules of the game" without notice if this is deemed necessary in relation to the monetary and foreign-exchange policy. In the event of currency unrest Danmarks Nationalbank may thus replace the ordinary use of the instruments with management of liquidity volume or adjust the term to maturity for monetary-policy loans and certificates of deposit. The use of quantitative limitations to the counterparties' access to liquidity from Danmarks Nationalbank is, however, used only on very rare occasions. The last instance was in 1993 in connection with the crisis in the European Exchange-Rate Mechanism.
1.3.3 Monetary- and foreign-exchange-policy counterparties
Danmarks Nationalbank's monetary-policy counterparties are banks and mortgage-credit institutes that operate under the Danish Commercial Banks and Savings Banks Act or the Mortgage Credit Act and meet certain technical criteria. Danmarks Nationalbank may also give Danish branches of foreign credit institutions conducting equivalent business access to the monetary-policy instruments. Danmarks Nationalbank selects its monetary-policy counterparties on the basis of monetary-policy considerations. The delimitation of the group of counterparties is, inter alia, based on the expectation that the large monetary-policy counterparties are active participants in the money market and thereby contribute to ensuring a well-functioning marketplace with efficient price formation.
At end-2002 the number of monetary-policy counterparties in Denmark was 119, of which 115 were banks and 4 mortgage-credit institutes. The potential number of counterparties is just over 200. The banks and mortgage-credit institutes which do not have relations with Danmarks Nationalbank (typically small banks) handle their liquidity via accounts with correspondent banks.
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Only banks and mortgage-credit institutes may have access to the monetary-policy instruments. |
The monetary-policy loans are usually distributed among a relatively small number of counterparties. The number varies with the net position, but normally 10-20 counterparties have raised loans from Danmarks Nationalbank. The number of counterparties holding certificates of deposit is usually somewhat larger since the outstanding certificates of deposits are typically distributed among 50-60 counterparties. The limited number of counterparties in the market operations is fully sufficient to ensure the transmission of Danmarks Nationalbank's interest-rate changes and to provide liquidity to the entire banking sector.
Danmarks Nationalbank's group of counterparties to foreign-exchange transactions is determined as required, depending on market conditions. Significant market activity under the given foreign-exchange conditions and a capacity to handle payments via the international financial network, SWIFT, are the key requirements for Danmarks Nationalbank's counterparties in the foreign-exchange market for Danish kroner.
1.4 The monetary-policy instruments in Denmark compared to those of the eurosystem
The Eurosystem comprises the ECB and the national central banks in the euro area. Danmarks Nationalbank's monetary-policy instruments resemble those of the Eurosystem in a number of ways. There are some differences, however, most of which are related to the fixed-exchange-rate policy. Box 1.9 provides a summary overview of the overall operational framework for the Eurosystem's monetary policy.
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Box 1.9
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The Eurosystem comprises the ECB and the national central banks in the euro area. The Eurosystem's provision of liquidity to the banking sector takes place mainly via weekly main refinancing operations, conducted as tenders for bids via the national central banks in the euro area. Liquidity is granted as loans against collateral in securities, and the loans have a maturity of two weeks. The Eurosystem also provides liquidity via long-term refinancing operations conducted as monthly tenders for liquidity with a maturity of three months. In addition, the Eurosystem may apply fine-tuning refinancing operations to smooth out interest-rate fluctuations, particularly if the interest-rate fluctuations are caused by unexpected liquidity fluctuations. Finally, the Eurosystem may also conduct structural refinancing operations in order to adjust its net position vis-à-vis the financial sector over a longer period. The standing facilities of the Eurosystem are aimed at providing and absorbing liquidity on an overnight basis. The monetary-policy counterparties, comprising credit institutions in the euro area, can at their own initiative use the marginal lending facility to obtain overnight liquidity against collateral, and the deposit facility to make overnight deposits. The rate of interest on the marginal lending facility is higher than the rate of interest at which liquidity is allotted in the weekly main refinancing operations, while the rate of interest for the deposit facility is lower than the rate of interest in the market operations. The rates of interest on the standing facilities are normally the limits (a corridor of 2 percentage points) for the overnight interest rate in the euro area (EONIA). The Eurosystem's minimum reserve system imposes an obligation on credit institutions in the euro area to deposit an amount corresponding to 2 per cent of selected liabilities with the national central banks. The reserve requirement must be met on average over a reserve maintenance period of one month, normally running from the 24th of one calendar month to the 23rd of the following calendar month. The required reserves accrue interest at the average marginal rate in the main refinancing operations during the reserve maintenance period. In January 2003 the ECB announced that the maturity of the main refinancing operations will be shortened from two weeks to one week during the 1st quarter of 2004, cf. ECB (2003). At the same time, the timing of the reserve maintenance period will be changed so that it will always start on the settlement day of the main refinancing operation following the Governing Council meeting at which the monthly assessment of the monetary policy stance is pre-scheduled. Furthermore, as a rule, the implementation of changes to the standing-facility rates will be aligned with the start of the new reserve maintenance period (unlike today, when changes in the standing-facility rates take effect on the day after their announcement). See ECB (2001 and 2002) and Abildgren (2002) for a more detailed description of the monetary-policy instruments in the euro area. |
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One of the differences between Danmarks Nationalbank's instruments and those of the Eurosystem is that the latter's monetary-policy counterparties have access to a marginal lending facility. At their own initiative the counterparties may use this facility to obtain overnight liquidity against collateral. Danmarks Nationalbank's monetary-policy counterparties do not have access to an overnight lending facility. This means for instance that the overnight interest rate in the Danish money market may increase significantly in periods of unrest in the foreign-exchange market without changes in the monetary-policy interest rates. In certain situations such an increase in the overnight interest rate may help to dampen the unrest in the foreign-exchange market. The absence of such a facility may also help to support an efficient money market, since the counterparties are obliged to trade liquidity among themselves instead of borrowing from Danmarks Nationalbank.
Secondly, the Eurosystem employs reserve requirements in the monetary policy. The Eurosystem's minimum reserve system imposes an obligation on credit institutions in the euro area to hold certain minimum balances with their national central banks. The reserve requirements must be met on average over a period of one month. The required reserves accrue interest at the average marginal rate for the main refinancing operations in the reserve maintenance period. The minimum reserve system serves two purposes: firstly, it helps to stabilise the overnight interest rate since the counterparties have an incentive to lend liquidity in the market when the overnight interest rate exceeds the rate of interest on required reserves. On the other hand, the counterparties have an incentive to maintain ample reserves in the periods when the overnight interest rate is below the rate of interest on required reserves. Secondly, the minimum reserve system helps to ensure that the counterparties remain in a structural liquidity deficit vis-à-vis the Eurosystem, which is assumed to enhance the transmission of the monetary-policy interest rates to the market interest rates.
In Denmark the current-account-limit system imposes a ceiling on current-account deposits. Such a ceiling is not compatible with a minimum reserve system as applied by the Eurosystem. Danmarks Nationalbank has also traditionally attached less importance to reducing fluctuation (volatility) in the overnight interest rate, since the volatility does not impact money-market interest rates for longer maturities. In addition, the sign preceding the counterparties' net position has no monetary-policy significance in Denmark due to the inherent symmetry in the conditions for monetary-policy loans and certificates of deposit. This is important as the sign of the net position may shift from time to time, particularly as a result of Danmarks Nationalbank's purchase and sale of foreign exchange.
Thirdly, the Eurosystem conducts its refinancing operations as tenders. In this way it is possible to manage the amount of liquidity provided to the banking system. Danmarks Nationalbank does not usually conduct tenders when granting monetary-policy loans. Instead, it determines a 14-day interest rate at which the counterparties themselves can determine the volume of monetary-policy loans and placement in certificates of deposit (an "open window"). This is a simple and transparent way of providing liquidity and managing interest rates when no other considerations are to be taken into account (e.g. managing the amount of liquidity provided to the counterparties).
In the period from 28 June 2000 to date (early June 2003) the Eurosystem's main refinancing operations have been conducted as variable-rate tenders in which the counterparties submit bids for both interest rates and amounts. Bids at the highest interest rate are satisfied first, and the bid rate applies. The ECB successively accepts bids at lower rates until the desired amount has been allotted. The lowest rate at which liquidity is allotted is known as the marginal rate, and liquidity may be allotted on a pro-rata basis at this rate (i.e. the individual counterparty is granted liquidity on the basis of the size of its bid at the marginal rate as a ratio of the total amount bid at the marginal rate). Prior to the variable-rate tenders the Governing Council of the ECB announces a minimum bid rate which is the lowest rate at which bids from the counterparties will be accepted. The minimum bid rate is the ECB's key monetary-policy interest rate.
Danmarks Nationalbank's monetary-policy interest rates are normally changed in step with the ECB's minimum bid rate, cf. Chart 1.9. Small or temporary movements in the ECB's marginal rate will not usually lead to changes in Danmarks Nationalbank's lending rate, but will result in minor fluctuations in the spread between the ECB's marginal rate and Danmarks Nationalbank's lending rate.[8]
| Monetary-policy interest rates in denmark and the euro area |
Chart 1.9
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| Note: Throughout the period shown, Danmarks Nationalbank's discount rate has corresponded to the ECB's minimum bid rate, so that the two curves overlap. | |
| Source: ECB and Danmarks Nationalbank. | |
[1]A key exception is the USA, which operates with accrual of intraday interest in connection with intraday credits from the Federal Reserve, FED, for settlement of payments. The FED charges the banks a fee per minute for intraday overdrafts.
[2]In a referendum held on 28 September 2000 a proposal for Denmark to adopt the single currency, the euro, was rejected. The following countries introduced the euro as from 1 January 1999: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain. Greece adopted the single currency with effect from 1 January 2001.
[3]The main principles and provisions for ERM II can be found in the Resolution of the European Council at its meeting in Amsterdam in June 1997, the communiqué issued by the informal meeting of the ECOFIN Council on 25-27 September 1998 in Vienna between the EU member states' ministers for economy and finance and their central-bank governors, and the Agreement of 1 September 1998 between the ECB and the national central banks of the Member States outside the euro area. The Resolution, Communiqué and Agreement can be found at Danmarks Nationalbank's website, www.nationalbanken.dk, under "Monetary Policy", "Exchange Rate Mechanism / ERM II". The Agreement can also be found in the Official Journal of the European Community (1998).
[4]Recent years' experience with the use of the monetary-policy instruments is described in Danmarks Nationalbank (2003b).
[5]The present current-account-limit system was introduced in June 1999.
[6]A list of the current-account limits can be found at Danmarks Nationalbank's website, www.nationalbanken.dk, under "Monetary policy", "Instruments" or under "Rules", "Monetary and foreign-exchange policy".
[7]Seen from the counterparties' point of view, the total net position vis-à-vis Danmarks Nationalbank is given on the basis of the other items on Danmarks Nationalbank's balance sheet and is affected by movements in these items. In the short term particularly the government's krone-denominated net payments may entail fluctuations in the net position. In the longer term the net position is primarily influenced by Danmarks Nationalbank's purchase and sale of foreign exchange, cf. Section 1.5. In Danmarks Nationalbank's market operations the counterparties must decide overall – within the limits for current-account deposits – how much of the net position to place in liquid funds (current account) and how much in net terms to place in 14-day contracts (certificates of deposit less monetary-policy loans). This choice can be theoretically described via a portfolio model where the choice reflects the liquidity requirement versus the wish for the maximum return. Current-account deposits entail a loss of interest, since the 14-day interest rate is higher than the current-account interest rate. On the other hand, 14-day transactions entail a loss of liquidity since only current-account deposits are fully liquid.
[8]In the summer and autumn of 2000 Danmarks Nationalbank adjusted its lending rate, however, when the marginal rate for the ECB's main refinancing operations systematically changed in relation to the minimum bid rate. In this period the market participants generally expected interest rates to increase. The changes which the ECB plans to introduce during the 1st quarter of 2004, cf. Box 1.9, are expected to reduce the impact of interest-rate expectations on bidding at the ECB's auctions, cf. ECB (2003).