Danish Central Bank Breaks With ECB to Fight Krone Pressure

Denmark kept interest rates unchanged to strengthen the krone after intervening in the currency markets, opting not to follow the European Central Bank back into negative territory.

The deposit rate was kept at 0.05 percent and the main lending rate was left at 0.2 percent, Copenhagen-based Nationalbanken said today. Danske Bank A/S said late yesterday it expected Denmark to deliver a cut given the scope of the ECB’s stimulus measures. Other banks, including Scandinavia’s biggest, Nordea Bank AB, had predicted no change in rates.

Danish policy makers raised the deposit rate in April, exiting negative territory after almost two years. The ECB yesterday cut its deposit rate to below zero for the first time as ECB President Mario Draghi unveiled a round of measures to help fight the threat of deflation amid a sluggish recovery.

“As usual, we’re monitoring what the ECB does and this time we decided not to follow,” Danish central bank spokesman Karsten Biltoft said by phone. “We left the rate unchanged, which will normally expand money market rate spreads.” It “was our assessment” that doing so would strengthen the krone, he said.

Krone Gains

The Danish currency climbed as high as 7.4614 per euro, compared with yesterday’s close of 7.4620. On March 26, it slid as low as 7.4671, its weakest since June 2006. The rate has averaged 7.4504 in the past five years, according to data compiled by Bloomberg. The spread, or difference in yield, between Denmark’s benchmark two-year note and its German equivalent, widened two basis points to seven basis points, the biggest margin since March 31.

“The Danish krone was strengthened against the euro this morning,” said Rasmus Gudum, an economist at Svenska Handelsbanken AB in Copenhagen, in a note. “It will be interesting to see how big the effect is on the krone in the coming period.”

Denmark has been forced to stray from its pattern of moving in lock step with the ECB during the global financial crisis as sudden shifts in capital flows test its currency peg.

The Danish central bank said earlier this week it had intervened in the currency market, purchasing kroner for a second month to support the exchange rate. Denmark doesn’t hold scheduled meetings and only changes rates to maintain its fixed exchange rate. It first resorted to negative rates in July 2012 after the nation’s status as a haven from Europe’s debt crisis triggered a sudden capital influx. Since then, investors have returned to markets in Europe’s core, reducing demand for debt sold by AAA-rated governments.

The Job

“The ECB is doing the Danish central bank’s work for it,” Helge Pedersen, chief economist at Nordea in Copenhagen, said in a note. “If they hadn’t cut rates, the Danish central bank would probably have had to consider when the next rate rise needs to come.”

The rate was kept unchanged “due to sale of foreign exchange in the market since the beginning of April, the development in the market interest rates, and the Danish krone rate,” the bank said today. “Hence, the differences between the monetary policy interest rates in Danmarks Nationalbank and ECB widens. This will normally be reflected in the money market rates, which determines the Danish krone rate.”

Economists earlier this year had started to question the bank’s commitment to the peg after Denmark refrained from intervening even as the currency weakened to an eight-year low. The bank targets a krone rate of 7.46038 per euro. Though its official tolerance band is 2.25 percent, in practice the bank has acted to keep the exchange rate within about 1 percent of its target.

The ECB yesterday opened a 400-billion-euro ($546 billion) liquidity channel tied to bank lending and officials are also working on an asset-purchase plan.

While conceding that rates are at the lower bound “for all practical purposes,” Draghi signaled policy makers are willing to act again.

The Danish capital was closed yesterday due to a bank holiday.

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