Denmark Cuts Key Rate to Minus 0.6% to Defend Currency Peg
Denmark’s central bank cut its main interest rate after $8 billion in currency market interventions weren’t enough to defend the krone’s peg to the euro.
The benchmark deposit rate was cut to minus 0.6% from minus 0.5%, Copenhagen-based Nationalbanken said on Thursday. The lending rate was also lowered, to minus 0.45% from minus 0.35%. The krone was little changed against the euro at 7.4364 as of 5:24 p.m. in Copenhagen.
The central bank of AAA-rated Denmark doesn’t hold scheduled meetings and only adjusts rates to defend the currency peg. It first delved below zero in mid-2012, and now boasts the longest stint of negative rates in the world.
As monetary authorities in other rich nations are moving to reduce stimulus, the Danish central bank has dumped roughly 50 billion kroner ($8 billion) on the market this year in an effort to weaken the currency. Thursday’s decision to cut rates shows those interventions weren’t enough.
“They have felt so much pressure that they needed to act now,” Jan Storup Nielsen, an economist at Nordea, said by phone. “The market anticipated this and I expect only a limited market reaction.”
Economists have been split over rate cut prospects amid signs that pressure on the krone is easing. The central bank didn’t intervene in August, though some economist estimate that it might subsequently have sold kroner to weaken the currency.
“The market will wonder whether this is enough or whether more is to come,” Jens Peter Sorensen, chief analyst at Danske Bank, said by phone “We will keep an eye on the net positions at the central bank and whether the EUR/DKK cross will stay at around 7.4360.”
Among the factors speaking against a cut: the economy has recovered from pandemic lockdowns better than expected, and a booming housing market is already causing financial stability worries.
©2021 Bloomberg L.P.