"Danmarks Nationalbank has the necessary instruments to defend the fixed exchange rate policy for as long as its takes," the central bank's governor Lars Rohde said in a statement, adding "there is no upper limit to the size of the foreign exchange reserve."
The central bank left the benchmark lending rate, the discount rate and the current account rate unchanged at 0.05 percent, 0.0 percent and 0.0 percent, respectively.
Since the Swiss National Bank (SNB) on Jan. 15 surprised financial markets - and even other central bankers - and abandoned its Swiss franc peg to the euro, Denmark has seen a considerable inflow of foreign currency, pushing up the exchange rate of the crown.
Denmark, which is a member of the European Union (EU) but the European Central Bank (ECB) and the single currency, has used a fixed exchange rate since 1982 to control inflation. Initially, the crown was fixed to the German mark due to the close trading relations with Germany and the Bundesbank's commitment to low inflation, and then from 1999 to the euro.
The Nationalbank uses a combination of interest rates and intervention in currency markets to make it more or less attractive for investors and traders to hold Danish crowns. Its target is to keep the crown at a central rate of 7.46038 to the euro, within a tolerance band of plus/minus 2.25 percent, or in a rate of 7.29252 to 7.62824 euros.
In the days following the Swiss move, the crown strengthened to around 7.43 but since then central bank intervention has helped push it back down, and today it was trading around 7.44 to the euro.
In January alone, the central bank spent 106 billion crowns to hold down the crown, boosting its reserves to a record 564 billion.
"There is no upper limit to the size of the foreign exchange reserve," Governor Rohde said, adding that the central bank's revenue is positively affected by the increase in foreign exchange reserves.
Following the SNB's scrapping of its upper limit of the franc to the euro, the Danish central bank first cut its deposit and lending rate by 15 basis points on Jan. 19, then cut the deposit rate by another 15 basis points on Jan. 22, and then again by another 15 points on Jan. 29.
In addition on Jan. 30, the Danish finance ministry suspended the sale of domestic and foreign bonds to inhibit the inflow of foreign exchange. Danish government bonds are among the few to have retained their triple-A rating, making them attractive to global investors.
Danmarks Nationalbank issued the following statement:
"Effective from 6 February 2015, Danmarks Nationalbank's interest rate on certificates of deposit is reduced by 0.25 percentage points to -0.75 per cent. The lending rate, the discount rate and the current account rate remain unchanged at 0.05 per cent, 0.0 per cent and 0.0 per cent, respectively.
The interest rate reduction follows Danmarks Nationalbank's purchase of foreign exchange in the market.
Following the decision by the Swiss National Bank to discontinue the minimum exchange rate and the decision by the European Central Bank to launch an expanded asset purchase programme, there has been a considerable inflow of foreign currency.
The traditional monetary policy instruments of the fixed exchange rate policy are interventions in the foreign exchange market and influencing the interest rate spread relative to the euro area. Danmarks Nationalbank's interventions in the foreign exchange market amounted to kr. 106.3 billion in January and the rate on certificates of deposit has been lowered several times. Additionally, the Ministry of Finance has decided to suspend the issuance of domestic and foreign bonds until further notice, based upon the recommendation of Danmarks Nationalbank. These measures have been taken with the intention to inhibit the inflow of foreign exchange.
"The fixed exchange rate policy is an indispensable element of economic policy in Denmark – and has been so since 1982. Danmarks Nationalbank has the necessary instruments to defend the fixed exchange rate policy for as long as it takes", says Lars Rohde.
Lars Rohde continues: "There is no upper limit to the size of the foreign exchange reserve. The sole purpose of the monetary policy instruments is maintaining a stable krone exchange rate against the euro. The revenue of Danmarks Nationalbank is positively affected by the increase of the foreign exchange reserves."