Denmark Exits Negative Rate Regime as Krone Defense Tightens


Denmark’s central bank showed currency speculators it won’t tolerate any test of the krone’s peg to the euro, ending an experiment with negative interest rates that started in 2012.

Copenhagen-based Nationalbanken raised its deposit rate yesterday, bringing it to 0.05 percent from minus 0.1 percent. It left the lending rate unchanged at 0.2 percent and said it intervened in the currency market, purchasing kroner to support the exchange rate. The move leaves Denmark’s deposit rate higher than the European Central Bank’s, which is at zero.

Nationalbanken doesn’t hold scheduled meetings and only changes rates to defend the krone’s peg. It first resorted to negative rates in July 2012 after Denmark’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, and the krone.

“I would have expected the bank to raise its deposit rate to be at par with the ECB,” said Lars Peter Lilleore, chief analyst at Nordea Bank AB, in a phone interview. “Fixing it higher is clearly an attempt to strengthen the krone beyond that.”

The krone was little changed as of 7:37 a.m. in Copenhagen, after strengthening to 7.4623 per euro yesterday, from 7.4667, its biggest intraday gain in more than seven months. On March 26, it hit 7.4671, its weakest since June 2006. The rate has averaged 7.4499 in the past five years, according to data compiled by Bloomberg.

Baby Steps

“A special epoch in Denmark’s monetary policy history” has “come to an end,” Ulrik H. Bie, chief economist at Nykredit A/S, Denmark’s biggest mortgage bank, said in a note. The rate increase marks a “first, baby step toward a normalization of Danish monetary policy.”

Governor Lars Rohde, who took over at the bank in February 2013, said last month weakness in the krone was due to a “technicality,” caused by a widening gap between Danish and euro-area money market rates as financial institutions in the single currency bloc repay extraordinary funds borrowed from the ECB.

Economists had started to question Rohde’s commitment to the peg after the bank refrained from intervening even as the currency weakened to an eight-year low. The krone had depreciated past its January 2013 level, when the central bank last resorted to a rate increase.

Market Rules

“Rohde has stayed away from intervening for 14 months and showed more reluctance to intervene than his predecessors,” seeming “more keen to let the market govern the currency,” said Jens Naervig Pedersen, a strategist at Danske Bank A/S. “We’ve learned how far Rohde is willing to let the krone drift and it seems to be around 7.4660, 7.4670 — the level it has been trading at in the past couple of weeks.”

Monetary tightening in Denmark comes as the ECB signals it may start broad-based asset purchases if the inflation outlook in the 18-nation euro bloc worsens. The ECB has kept its benchmark rate at a record low of 0.25 percent for five meetings. President Mario Draghi said this month the bank is “resolute” in keeping policy loose.

Denmark’s central bank yesterday also reduced the ceiling it puts on the current account for monetary counterparties to place their funds to 38.5 billion kroner ($7.1 billion) from 67.4 billion kroner.

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.

“What prompted the central bank to act was probably that the negative carry on EUR/DKK positions had been growing in the past week,” Pedersen at Danske said. “The Danish central bank doesn’t consider what the ECB does or may do. It only considers what is happening to the krone and acts accordingly.”


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