Learn about monetary policy instruments

Given the fixed exchange rate policy, Danmarks Nationalbank’s task is to ensure a fixed krone exchange rate against the euro. In practice, we do this in two different ways: through interventions in the foreign exchange market and by setting interest rates on the loan and placement options that Danmarks Nationalbank provides to banks and mortgage credit institutions – also known as monetary policy instruments.

Danmarks Nationalbank monitors the Danish krone closely and is ready to step in – or intervene – if the krone starts to deviate too much from the euro. For example, if the exchange rate becomes too low, Danmarks Nationalbank can choose to sell currency from the foreign exchange reserve and buy Danish kroner in the foreign exchange market, thus restoring the krone exchange rate against the euro.

If the krone begins to deviate too much from the euro and the purchase and sale of currency does not have a sufficient effect, Danmarks Nationalbank can also defend the krone exchange rate through unilateral adjustment of interest rates on the various loan and placement options provided by Danmarks Nationalbank to the banks and mortgage credit institutions.

The banks and mortgage credit institutions are called monetary policy counterparties, while the loan and placement options, or facilities, provided by Danmarks Nationalbank are called monetary policy instruments. The interest rates on the various instruments are called monetary policy interest rates.

The second bankday of each month, Danmarks Nationalbank publishes last month's level of intervention.

Current accounts and open market operations

Danmarks Nationalbank maintains accounts for monetary policy counterparties, undertaking the settlement of their mutual payments. The monetary policy interest rates are the current account rate, the lending rate and the certificate of deposit rate and are linked to the loan and placement facilities made available to counterparties by Danmarks Nationalbank.

Danmarks Nationalbank has two main types of facilities:

  • Current accounts enabling monetary policy counterparties to place their overnight liquidity on demand. The current account accrues interest at the current account rate.

  • Open market operations enabling monetary policy counterparties to place liquidity on the last banking day of the week by purchasing certificates of deposit or taking out monetary policy loans with securities as collateral. Certificates of deposit and monetary policy loans accrue interest at the certificate of deposit rate and the lending rate, respectively.

Current accounts

Each monetary policy counterparty has an on-demand account, or current account, at Danmarks Nationalbank, accruing interest at the current account rate. Current account balances are freely available to monetary policy counterparties from day to day and may be used as a means of payment on the counterparties’ own initiative, e.g. in connection with transfers between counterparties. The current account also serves as a settlement account for lending and deposits between the counterparty and Danmarks Nationalbank, as a settlement account for currency and securities trading and for large payments to and from the central government.

While overdrafts are not allowed at the end of the monetary policy day at 16:45, there is no limit to how much liquidity monetary policy counterparties can place in current accounts. Previously, monetary policy counterparties had an individual limit on the maximum current account balance, but this was suspended by the most recent adjustment of monetary policy instruments in 2021.

Weekly open market operations

On the last banking day of each week, Danmarks Nationalbank conducts open market operations enabling counterparties to raise monetary policy loans against collateral and place deposits by purchasing certificates of deposit issued by Danmarks Nationalbank. The maturity of both certificates of deposit and monetary policy loans is usually one week.

In its open market operations, Danmarks Nationalbank uses a so-called open window, open from 10:00 to 16:45 for certificates of deposit and from 10:00 to 13:00 for loans on the day in question. Accordingly, Danmarks Nationalbank fixes the interest rates, after which the counterparties are free to determine the volume of monetary policy loans and certificates of deposit.

Certificates of deposit may be traded among the monetary policy counterparties, but not outside the group of counterparties. Certificates of deposit are settled on the day of the open market operation. Certificates of deposit are zero coupon securities.

All monetary policy lending is made against collateral by counterparties. The collateral basis consists of securities - primarily government and mortgage bonds. The loans are settled on the day of the open market operation with immediate settlement and fall due for redemption on expiry.

The net position – the aggregate use of monetary policy instruments

The net position covers the total net deposits of monetary policy counterparties in Danish kroner with Danmarks Nationalbank for monetary policy purposes. As a general rule, the net position is defined as counterparties’ holdings of certificates of deposit and current account deposits less monetary policy loans. 

While monetary policy counterparties may influence the composition of the net position (the volume of monetary policy loans, certificates of deposit and current account deposits), only Danmarks Nationalbank and the government can influence the overall size of the net position. Danmarks Nationalbank publishes a monthly projection of the central government’s impact on the net position by way of central government receipts and outlays.

Pass-through to the money market and DESTR

When Danmarks Nationalbank changes its monetary policy interest rates, monetary policy counterparties will typically adjust their interest rates to household and corporate customers accordingly. This pass-through from Danmarks Nationalbank’s monetary policy interest rates to interest rates in the financial markets and the real economy is crucial for the effect of Danmarks Nationalbank’s monetary policy.

The money market in Danish kroner is an important channel for the pass-through of Danmarks Nationalbank’s monetary policy interest rates to the financial markets and the real economy. The money market reflects loan transactions and their derivatives with a maturity of less than 1 year. Danmarks Nationalbank therefore also monitors developments in the money market and is the administrator of DESTR, the short-term reference rate in Danish kroner. Reference rates are part of a wide range of financial contracts – including bank loans, mortgage bonds and interest rate swaps – making them an important building block in the financial markets.

Extraordinary open market operations

Liquidity-adjusting operations

In order to support the fixed exchange rate policy, Danmarks Nationalbank can conduct liquidity-adjusting operations in the money market when and to the extent needed. The operations can be carried out either as deposits at Danmarks Nationalbank, lending against pledging of assets in Danmarks Nationalbank’s collateral basis or as FX swaps, in which the collateral is foreign exchange. 

Danmarks Nationalbank allocates or absorbs krone liquidity through auctions or bilateral transactions. Operations can be conducted with all monetary policy counterparties or with a smaller group of counterparties. Operations will be announced.

Swap lines with other central banks

Danmarks Nationalbank has swap lines with the European Central Bank (ECB) and Norges Bank. A currency swap is an agreement to exchange two currencies and later exchange them back again where all the details of the exchange have been agreed on in advance. These agreements thus enable Danmarks Nationalbank to offer monetary policy counterparties liquidity in euro and Norwegian kroner.

The agreement between the ECB and Danmarks Nationalbank runs for as long as deemed necessary and can be activated at short notice. The threshold for the swap line is 24 billion euro. 

Danmarks Nationalbank previously had swap lines with the US Federal Reserve (the Fed) in connection with the financial crisis in the autumn of 2008 and later the outbreak of Covid-19 in March 2020. The latest agreement with the Fed expired in December 2021.


Read more about monetary policy

Learn more about the operational aspect of monetary policy

Read more about how Danmarks Nationalbank operationalises monetary policy in the publication 'Monetary policy in Denmark' from 2009.