Toftdahl highlights Danish repo market's role in stability and policy
Danmarks Nationalbank Director Martin Wagner Toftdahl emphasized the Danish repo market's crucial role for financial stability and monetary policy transmission. He highlighted recent volatility and the importance of efficient liquidity distribution.
The backbone of Danish finance
Danmarks Nationalbank Director Martin Wagner Toftdahl provided a central bank perspective on the Danish repo market, highlighting its critical function for the country's financial system.
Danish banks primarily lend liquidity to other market participants, with investment funds, particularly the five largest, accounting for roughly half of the total repo market.
A significant portion of these repo loans is used by the funds to leverage investments in Danish mortgage bonds.
Toftdahl stressed that a stable and predictable repo market is essential, as it facilitates liquidity access, supports risk management, and drives demand for bonds.
Danish banks play a central role in maintaining this stability.
Monetary policy's crucial channel
The repo market is essential for monetary policy transmission, influencing the pass-through from policy rates to money market rates.
This channel allows Danmarks Nationalbank to structurally impact the krone exchange rate and support its fixed exchange rate policy.
Money market rates, including repo rates, should align closely with the central bank's monetary policy interest rates.
The central bank's fifteen-basis-point interest rate corridor incentivizes counterparties to actively manage liquidity, either by placing it into the market or utilising the weekly lending facility.
This active management is crucial for ensuring money market rates remain within the established corridor.
Market efficiency at stake
Recent volatility in krone money markets signals a critical need for more efficient liquidity distribution, indicating the market is not always functioning effectively.
Danmarks Nationalbank's clear message about its lending facility aims to normalize its usage, which is essential for market stability, especially during periods of low net positions.
This proactive stance is vital to ensure robust monetary policy transmission and a predictable repo market.