Denmark Breaks With Currency Defense Tradition After ECB Cut

Denmark held its key policy rate unchanged, breaking with a custom of following the European Central Bank after it unexpectedly lowered its benchmark rate to rekindle inflation in the euro area.

The Danish central bank held its lending rate at 0.2 percent, following a quarter-point cut by the ECB to 0.25 percent earlier today, Copenhagen-based Nationalbanken said. It’s the first time since October 2008 Denmark hasn’t followed an ECB move with a change in rates. The bank kept its deposit rate at minus 0.1 percent, compared with the ECB’s 0 percent rate. The Danish rate has been below zero since July last year.

The bank only adjusts rates to defend the krone’s peg to the euro and typically moves in steps after the ECB. In January, it raised rates by 10 basis points after signs of improvement in the euro area resulted in an outflow of funds from Denmark.

“The krone is relatively weak versus the euro,” said Rasmus Gudum, an economist at Svenska Handelsbanken AB in Copenhagen, in a note.

Denmark had come under pressure to fight off krone appreciation after the AAA-rated nation emerged last year as a haven during the euro area’s debt crisis. Central Bank Governor Lars Rohde in May cut the lending rate and said in June there’s no limit to how far below zero the deposit rate could fall to defend the krone peg. He’s said the lending rate can’t drop below zero.

Bit Surprised

The krone gained 0.01 percent to 7.4581 against the euro as of 4:03 p.m. local time. The central bank targets a rate of 7.46038 against Europe’s single currency inside a 2.25 percent band. Based on closing prices, the krone strengthened the most since Sept. 27.

Denmark’s foreign currency reserves were 491 billion kroner in October, staying close to an all-time high. Denmark’s emerged as a haven last year as the nation keeps public debt at less than half the average in the single currency bloc, relative to gross domestic product. Foreign currency reserves reached a peak of 514.4 billion kroner in August last year.

“It’s a bit of a surprise that the central bank stays calm,” said Jens Naervig Pedersen, an analyst at Danske Bank A/S. “We had expected Nationalbanken to copy its response from May, when the ECB cut its key rate last, and lower the rate by 0.1 percentage point.”

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