Monday, 16 September 2019 09:11 GMT
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Denmark cuts deposit rate further below zero to defend euro peg




(MENAFN - AFP) Denmark's central bank cut its deposit interest rate further Thursday and said there was "no upper limit" to its foreign currency interventions aimed at defending the krone's link to the euro.

Nationalbanken cut the deposit rate -- for the fourth time in less than three weeks -- by 0.25 percentage points to -0.75 percent but left its lending rate unchanged at 0.05 percent.

On January 19 the deposit rate, which was cut to below zero in September for the first time since 2012, was reduced to -0.2 percent from -0.05 percent. Two further cuts followed on January 22 and 29.

"The fixed exchange rate policy is an indispensable element of economic policy in Denmark... Danmarks Nationalbank has the necessary instruments to defend the fixed exchange rate policy for as long as it takes," says the bank's director Lars Rohde.

"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," he added.

With the value of the euro sliding due to European Central Bank's decision to inject massive amounts of liquidity into the eurozone economy through a bond buying programme, the Danish central bank has had to take radical measures to defend the krone's exchange rate.

- Peg 'carved in stone' -

On Tuesday the bank announced that it has spent 106.3 billion krone ($16.36 billion, 14.3 billion euros) -- almost 6 percent of the country's GDP -- on the foreign exchange in an attempt to bring down the value of the Danish krone.

"The market should soon get convinced that the currency peg is carved in stone," Helge Pedersen, chief economist at Nordea Bank commented on Twitter.

Some speculators have bet on the possibility of Denmark abandoning its policy of shadowing the euro in the wake of the turbulence caused by the ECB's aggressive monetary policy, and Switzerland removing its cap of 1.20 francs to the European single currency.

Jessica Hinds, an analyst at Capital Economics said the decision to make a fourth rate cut showed that Denmark's central bank was "struggling to protect its peg to the euro in the face of substantial demand for Danish assets," and that the banks will need to do more.

"We certainly would not rule out further cuts to the deposit rate, and further foreign exchange intervention is likely."

Danish Prime Minister Helle Thorning-Schmidt has said she has "full confidence that the National Bank will keep its fixed exchange rate policy."

On Thursday the central bank director said its recent moves have strengthened the country's monetary position.

"The revenue of Danmarks Nationalbank is positively affected by the increase of the foreign exchange reserves," he said.

Denmark has since the 1980s pegged the krone to limit exchange rate volatility.

While Danes voted not to join the euro, the krone has since 1999 not been allowed to deviate by more than 2.25 percent from a fixed rate of about 7.46 krone per euro.

Switzerland's decision to remove its peg to the European single currency has made Denmark the last remaining European currency linked to the euro.


Denmark cuts deposit rate further below zero to defend euro peg

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