Thursday, January 24, 2013

Denmark raises key rates as safe haven appeal wanes

    The Danish central bank, which aims to keep its currency stable against the euro, has raised its key interest rates following the sale of foreign exchange to support the krone, a sign that euro zone investors are no longer anxious to seek safe haven in the Scandinavian country.
    The benchmark lending rate, which was cut to a record low last July, was raised by 10 basis points to 0.30 percent and the rate on certificates of deposit was raised to minus 0.10 percent from minus 0.20 percent. 
    The National Bank of Denmark entered unchartered territory in July when it cut the rate on CDs to negative to weaken demand for the krone after jittery euro zone investors sought safe haven, pushing the krone above its peg and threatening to make Danish exports uncompetitive.
    In recent months, however, the krone has weakened as investors' optimism over the prospects for the euro zone has improved and the Danish central bank has been buying its own currency to support it.
    The central bank's board of governors do not hold scheduled meetings but normally adjust their rates in response to changes by the European Central Bank (ECB).
    The board left the discount and current account rates unchanged at zero percent.

   The National Bank's framework is to keep the krone within a band of plus/minus 2.25 percent of a central rate of 7.46 krone per euro, which means it can fluctuate between 7.63 and 7.29 euro. The krone was trading around 7.46 euros shortly after the central bank raised interest rates.
    When the Danish central bank raises its interest rates relative to the ECB's rates, the krone will have a tendency to appreciate, while it will tend to weaken when interest rates are cut.
    Danish banks have complained about the negative rates on CDs as it meant they had to pay to deposit funds with the central bank while they still had to pay their own customers interest to attract stable funding.


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