Monday, January 19, 2015

Denmark cuts lending, deposit rates by 15 bps

    Denmark's central bank cut its benchmark lending rate and its deposit rate by 15 basis points to ease the upward pressure on the exchange rate of its crown currency, a move that had been expected following Switzerland's scrapping of its peg to the euro.
   The rate cut reduces the Danish lending rate to 0.05 percent and the deposit rate to minus 0.20 percent. The current account rate and the discount rate remain unchanged at 0.0 percent.
    The main objective of Danmark's Nationalbank is to defend the exchange rate of the Danish krone to the single European currency as a way to control inflation. The Danish central bank has a target of keeping the crown at 7.46038 euros, within a tolerance band of plus/minus 2.25 percent.
    "The interest rate reduction follows Danmarks Nationalbank's purchase of foreign exchange in the market," the Danish central bank said.  In the last three months of 2014 the Danish central bank spent some 7 billion crowns to maintain the exchange rate to the sliding euro.
    Like the Swiss franc, the Danish crown enjoys a safe-haven status among many European investors and the central bank introduced a negative deposit rate of minus 0.20 percent in July 2012 in response to the sovereign debt crises when serious questions were being raised about the survival of the euro.
    But in April 2014 the central bank ended its experiment with negative deposit rates by raising the rate to 0.05 percent in response to growing optimism that the euro zone economy was improving.
    But in September 2014 the Nationalbank then again cut the deposit rate by 10 basis points to minus 0.05 percent following the ECB's cut in its policy rate to effectively zero and pushed its own deposit rate to minus 0.20 percent.
    The move by the Danish central bank comes ahead of Thursday's meeting by the ECB, which is expected to lead to full-scale quantitative easing with the purchase of government bonds.

    This upward pressure on the crown intensified last week following last week's surprise decision by the Swiss National Bank (SNB) to scrap its 1.20 euro cap on the franc's exchange rate.
    The rate cut by the Danish central bank eased some of this pressure on the crown, with its rate falling to 7.435 per euro from 7.431 prior to the news. Since April, when the upward pressure on the crown began building, the crown has appreciated about 0.5 percent.


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