Danish Central Bank Says Negative Rates an Option

Danish Central Bank Cuts Benchmark Rate to 0.45% From 0.6%
Denmark's central bank signaled last week it is willing to let rates go negative to defend the peg. Photographer: Linus Hook/Bloomberg

Denmark’s central bank lowered its benchmark rate by 0.15 of a percentage point, easing policy for the second time this month to defend the Nordic country’s currency peg to the euro.

The main lending rate was cut to 0.45 percent from a record-low 0.6 percent, the Copenhagen-based bank said today. The rate it offers on certificates of deposit was reduced to 0.05 percent from 0.2 percent while its current account rate was lowered to zero. The bank doesn’t hold scheduled meetings and adjusts rates to counter pressure on the krone.

Denmark’s debt yield have sunk to record lows as investors fleeing the euro area turn to markets backed by fiscal discipline. Demand for kroner helped send two-year yields below zero this week as investors pay the government to hold its bonds. The central bank signaled last week it is willing to let rates go negative to defend the peg.

“Should investors continue to seek safety in Danish bonds, or if the European Central Bank lowers rates, the Danish bank will cut rates so that they become negative,” said Jacob Graven, chief economist at Sydbank A/S, in a note. “That would mean Danish banks will need to pay to place money in the central bank. That’s becoming increasingly likely to happen in the coming weeks.”

Smaller Deficit

The government of Prime Minister Helle Thorning-Schmidt on May 25 predicted a smaller budget deficit for this year than announced in December. The shortfall will shrink to 1.7 percent of gross domestic product next year, well within the European Union’s 3 percent threshold, it said.

The central bank has an agreement with the European Central Bank to let the krone appreciate or depreciate no more than 2.25 percent from a central rate of 7.46038. The krone hit a seven-year low of 7.4306 kroner to the euro on May 25, when the central bank last cut the rate to 0.6 percent.

Denmark will outgrow the euro-region average this year and next even as the Nordic country fights to contain the fallout of a burst property bubble and regional banking crisis. Gross domestic product will expand 0.8 percent this year and 1.4 percent in 2013, the Organization for Economic Cooperation and Development said May 22. That compares with a 0.1 percent contraction in the 17-member euro region in 2012 and 0.9 percent growth next year, according to the Paris-based organization.

The government said this month its deficit will narrow to 3.8 percent this year, versus a December forecast for 5.5 percent of gross domestic product.

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