Denmark’s Central Bank Raises Key Rate After Krone Weakens

(Bloomberg) -- Denmark’s central bank raised its key interest rate as policy makers try to prop up the krone and defend its peg to the euro.

The Copenhagen-based bank added 15 basis points to the benchmark deposit rate, bringing it to minus 0.6%, it said in a surprise statement on Thursday.

Denmark’s krone is among a number of small currencies under pressure as investors head for more liquid markets in response to the crisis triggered by the spread of the coronavirus. The krone of neighboring Norway had its worst day on record on Wednesday, prompting its central bank to warn it may intervene.

The decision by Danish policy makers looks like “a response to the liquidity crisis in FX markets and the weakening pressure on DKK,” Petr Krpata, chief EMEA FX and interest rates strategist, said. “Right now, it seems the currency liquidity is the name of the game and low liquid DKK has been suffering.”

Denmark’s announcement comes after the European Central Bank launched an emergency bond buying program worth 750 billion euros ($820 billion) in an effort to fight the intense market panic that’s followed the spread of the coronavirus.

Denmark’s mandate to defend the krone’s peg to the euro forces it to closely track actions by the ECB. The Danish central bank still holds the world record for the longest stint of negative rates, after it first tested the policy back in 2012.

The bank’s decision to hike is a reminder of the steps it needed to take at the beginning of the financial crisis of 2008. Back then, it raised rates in order to support the krone amid a liquidity crisis. It only subsequently cut rates when Europe’s debt crisis triggered an intense demand for safe-haven assets.

But on Thursday, there was some criticism of the central bank’s decision, as tightening policy in the middle of an economic crisis raised concerns about the fallout for the jobs market.

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