Denmark Raises Rates to Defend Krone as Haven Trade Fades

The Danish central bank raised its benchmark interest rates for the first time since July 2011 to defend the krone’s peg to the euro after investor appetite for the safest assets waned.

The Copenhagen-based bank raised the benchmark lending rate to 0.3 percent from a record-low 0.2 percent and increased the rate for certificates of deposit to minus 0.1 percent from minus 0.2 percent. The bank, which doesn’t hold scheduled meetings and adjusts interest rates to keep the krone close to a targeted 7.46038 rate against the euro, normally changes rates in tandem with the Frankfurt-based European Central Bank.

“The independent hike reflects that the debt crisis has come under control to an extent that investors are less afraid of losing their money,” Steen Bocian, chief economist at Danske Bank A/S in Copenhagen, said by phone.

Denmark in July tested what central bank Governor Nils Bernstein at the time called “uncharted territory” by cutting its deposit rate below zero for the first time. The step followed a capital influx that had threatened to strengthen the krone beyond the limits of its peg. The bank last changed rates independently of the ECB in May 2012.

Draghi Pledge

Europe’s leaders have since managed to persuade investors in the euro region that the worst of the debt crisis is over. ECB President Mario Draghi’s July pledge to do whatever it takes to keep the euro intact has helped push yields on bonds sold out of Spain and Italy lower, while yields on debt issued by AAA governments have risen.

The yield on Denmark’s 1.5 percent bond due 2023 traded at 1.646 percent as of 4:23 p.m. in Copenhagen, compared with as low as 1 percent in December. The difference in yield between 10-year benchmark Danish debt and similar-maturity German bunds was eight basis points today, versus a negative spread of 31 basis points in November, according to generic price data available on Bloomberg.

Danske Bank, Denmark’s biggest lender, rose 1.9 percent to 106.40 kroner at 4:19 p.m. in Copenhagen trading. The shares erased a loss of as much as 1.5 percent from earlier today. Jyske Bank A/S, the country’s second-largest listed lender, rose as much as 0.7 percent, outperforming a 0.3 percent decline in the Nasdaq OMX Copenhagen all-share index.

Capital Flows

“We still expect just one more similar hike from the central bank this year, but we cannot rule out that the normalization of capital flows could trigger more, though it will still be small-sized interventions,” Bocian said.

Denmark’s krone strengthened to 7.4613 against the euro, compared with 7.4619 prior to the rate increase announcement. The krone peaked in 2012 at its strongest level of 7.4306 against Europe’s single currency.

Over the past four months of last year, the central bank sold foreign currency to support the peg, buying Danish kroner for a combined 5.2 billion kroner ($930 million).

Before it's here, it's on the Bloomberg Terminal.