Danmarks Nationalbank’s key policy rate is currently at −0.75%. This is the rate on certificates of deposit. Nationalbanken sells CDs every Friday, expiring a week later, and occasionally also on other days. Banks also have access to a current account (foliokonto in Danish). Payments between banks, including for settlement of their customers’ payments, are carried out between current accounts. The interest rate on current accounts is currently 0%, or 75 bp higher than the CD rate.
Why don’t banks simply have all their reserves in current accounts? Because there is a limit, or quota, on each bank’s current account balance at the end of the banking day at 15:30. The smallest quota was 250 million kroner for the smallest banks; the largest bank, Danske Bank, had a quota of 5,250 million kroner.
Why are the rates different? It probably relates to the fact that current accounts are used for settlement of transactions, so reducing current account balances every day might cause practical difficulties. Combining the current account and the CD facility, we can interpret the interest on reserves as being 0% up to a limit, and then −0.75% above that limit.
Two days ago, Nationalbanken announced an increase in the current account limits from an aggregate of 37.5 million kroner to 145.5 million, which is a 288% increase. The effect on balances was immediate: yesterday, 8.5% of the banks’ net position was in current accounts. Today the figure was 36.5%. The aggregate current account quota utilization is 93% today, versus 86% yesterday.
JP Koning called it a stealth rate hike and he is right about that. Some increase in the quotas might have been justified on operational grounds, but certainly not the near-quadrupling that was announced.