Denmark Lowers Main Interest Rate to Lower Than Euro Area’s for First Time

Denmark’s central bank lowered its benchmark lending rate to below the European Central Bank’s rate for the first time as the Nordic nation defends the krone’s peg to euro amid a deepening regional debt crisis.

Nationalbanken cut the lending rate to 1.2 percent from 1.55 percent, after policy makers in Frankfurt lowered their main rate today to 1.25 percent, the Copenhagen-based bank said.

“The Danish central bank’s lending rate is for the first time below the level in the eurozone,” Jacob Graven, chief economist at Sydbank A/S, said in a note. “That reflects an historic degree of confidence in the Danish krone in relation to the euro.”

ECB officials, meeting under the presidency of Mario Draghi for the first time, cut the benchmark rate by a quarter point, a move expected by only four of 55 economists surveyed by Bloomberg News. The Danish bank, whose sole mandate is to keep the krone within a 2.25 percent band to the euro, doesn’t hold scheduled meetings and can change its rates at any time to defend the peg.

The central bank also said it purchased foreign currency to check the krone’s ascent. The currency traded at 7.4418 against the euro as of 5:03 p.m. in Copenhagen, compared with as strong as 7.4401 earlier in the day. The bank seeks to defend a central target of 7.46038 against Europe’s single currency.

“The rate cut provides a welcome helping hand for the Danish economy at a time when growth is low and the outlook bleak,” said Troels Theill Eriksen, a senior analyst at Nordea Bank AB.

Scandinavian Laggard

Denmark’s $325 billion economy is Scandinavia’s worst performing as the nation grapples with a banking crisis and housing slump. Most of the country’s banks have been cut off from funding markets, squeezing credit and stalling growth. Moody’s Investors Service said yesterday Denmark’s banking outlook remains negative amid sluggish economic prospects.

Gross domestic product will expand 1.1 percent next year, after growing 1.3 percent in 2011, the government-backed Economic Council said in a report today. Output next year may even contract as much as 0.5 percent if the government fails to galvanize consumer demand, the council said. The Finance Ministry, in a separate report today, sees GDP growing 1.1 percent in 2011 and 1.3 percent next year.

The central bank hadn’t changed its main interest rate independently of the ECB since January 2010. It lowered the rate it offers on certificates of deposit twice since Aug. 25 to stem krone gains as the euro crisis sent some investors to low-debt countries such as AAA rated Denmark.

Denmark’s foreign currency reserves reached the second- highest level on record at the end of last month, at 489.9 billion kroner ($90.7 billion), the central bank said yesterday.

To contact the reporter on this story: Christian Wienberg at cwienberg@bloomberg.net

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net

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