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Denmark’s Krone Defense Drives Benchmark Lending Rate Lower (2)

May 02, 2013

Denmark’s Krone Defense Drives Benchmark Lending Rate Lower

Danish policy makers have resorted to unprecedented easing to prevent the krone strengthening beyond the limits of its peg. Photographer: Chris Ratcliffe/Bloomberg

Denmark’s central bank lowered its benchmark lending rate following a cut from the European Central Bank as policy makers in Copenhagen defend the krone’s peg to the euro.

Nationalbanken lowered the lending rate to 0.2 percent from 0.3 percent, it said in a statement today. The deposit rate was held at minus 0.1 percent. The decision followed a 0.25 percentage point cut earlier today by the ECB, bringing the euro area’s main rate to 0.5 percent. Denmark’s central bank doesn’t hold scheduled meetings and only changes interest rates to maintain the exchange rate.

“The low monetary policy rates leave a limited leeway for a reduction of Denmark’s Nationalbank’s lending rate,” the central bank said in a statement. “In the current situation where the monetary policy counterparties have a large need to place funds at Danmark’s Nationalbank, the monetary deposit rates determine the money market rates and the exchange rate.”

Danish policy makers have resorted to unprecedented easing to prevent the krone strengthening beyond the limits of its peg. The nation’s status as a haven from Europe’s crisis -- thanks to a debt load that’s less than half the euro-zone average -- has fueled a capital influx into Denmark’s AAA markets and stretched the central bank’s tool box to its limits.

Krone Moves

The krone traded at 7.4550 per euro as of 4:32 p.m. in Copenhagen. That compares with yesterday’s close of 7.4561. It traded as strong as 7.4553 against the euro yesterday, versus the central bank’s targeted rate of 7.46038. The Danish currency was as strong as 7.4306 per euro in May last year and as weak as 7.4633 in January. Foreign currency reserves reached a high of 514.4 billion kroner ($91 billion) in August and have since declined to 491.7 billion kroner in April, the bank said today.

“There was leeway to lower the lending rate all the way to 0.05 percent,” Niels Roenholt, an economist at Jyske Bank A/S (JYSK) in Silkeborg, Denmark, said by e-mail. “The central bank prioritized to keep some space to that threshold and will still have space to move lower if needed.”

Asked by phone why the Danish central bank didn’t match the size of the ECB’s cut, Director Karsten Biltoft said “there’s a limit to how low the lending rate can go in the current situation.” He declined to comment further.

Banking Crisis

While fiscal restraint has kept public debt levels in check, Denmark has suffered more through the global financial crisis than neighboring Norway and Sweden. A more-than 20 percent slump in property prices since 2007 triggered a regional banking crisis that’s wiped out more than 12 banks since 2008.

Denmark’s $300 billion economy probably contracted last quarter, after shrinking 0.7 percent in the three months through December, according to Danske Bank A/S (DANSKE) and Svenska Handelsbanken AB. That would mark the nation’s third recession in less than four years.

Though the central bank’s policy mandate doesn’t give it scope to steer economic growth, the nation’s haven status has resulted in record low borrowing costs, helping households make debt payments. That’s held a cushion under Denmark’s economy as the government argues it doesn’t have room to stimulate demand further.

“With the uncertainties that persist in Europe it would be unwise to spend more as things can still change for the worse,” Economy Minister Margrethe Vestager said this week.

To contact the reporter on this story: Peter Levring in Copenhagen at plevring1@bloomberg.net

To contact the editor responsible for this story: Jonas Bergman at jbergman@bloomberg.net


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