Denmark’s central bank underlined its determination to defend the krone’s peg to the euro by cutting interest rates for a fourth time in less than three weeks, taking them to the joint lowest level in the world.
Nationalbank cut its deposit rate on Thursday by 25 basis points to minus 0.75 per cent, the same level as Switzerland’s central bank. The Swiss move to abandon the defence of its currency, coupled with the impending launch of quantitative easing in the eurozone, has led speculators to pour money into the Danish krone in the hope that the central bank will abandon the peg.
But Nationalbank is seeking to quell such moves by cutting interest rates by 70bp in the past 18 days and telling the government to stop issuing sovereign debt. The latter action led to Danish government debt trading with the lowest yields in the world behind Switzerland.
“The fixed exchange rate policy is an indispensable element of economic policy in Denmark — and has been so since 1982,” said Lars Rohde, Nationalbank governor.
The central bank had “the necessary instruments to defend the fixed exchange rate policy for as long as it takes”, he added.
Nationalbank revealed on Monday that it had spent DKr106.5bn ($16bn) defending the peg in January, swelling its balance sheet by almost a quarter to a record level.
But economists noted that Denmark’s foreign exchange reserves still represented roughly 30 per cent of GDP compared with about 80 per cent for Switzerland.
Mr Rohde added: “There is no upper limit to the size of the foreign exchange reserve. The sole purpose of the monetary policy instruments is maintaining a stable krone exchange rate against the euro. The revenue of Nationalbank is positively affected by the increase of the foreign exchange reserves.”
Jan Størup Nielsen, economist at Nordea, agreed, saying he expected Nationalbank to stabilise the situation “relatively quickly, as it has a strong interest in doing so to avoid a self-sustaining speculative spiral picking up speed”.
He added: “It is difficult to predict how long the pressure on Danish krone will continue. In our view, it is not a question of whether the central bank will maintain the close peg to the euro but purely a question of how much interest rates will be slashed and how much currency reserves will swell before the bank manages to stabilise the situation.”
The krone is permitted to trade within 2.25 per cent of an exchange rate of 7.46 per euro, although in practice the central bank tolerates a narrower band of about 0.5 per cent. The currency was trading at 7.446 on Thursday after the cut, slightly up on the day.
Denmark's two-year bond had a yield of minus 0.61 per cent, having traded in positive territory as recently as December.
Get alerts on Denmark when a new story is published