Danish central bank cuts rate as euro weakens

Denmark's central bank cut its deposit rate further into negative territory Monday as market players speculated the country could follow Switzerland's example and remove its currency peg against the euro.

Danish central bank cuts rate as euro weakens
Some are speculating that Denmark could follow Switzerland's example and remove the kroner's peg against the euro. Photo: Colourbox
Nationalbanken reduced its deposit rate, which was cut to below zero in September for the first time since 2012, to -0.2 percent from -0.05 percent on Monday.
The lending rate was lowered to 0.05 percent from 0.2 percent.
"The interest rate in Denmark is now the same as in the eurozone. This will take the pressure off the krone," Nordea economist Helge Pedersen wrote on Twitter.
The move came as analysts expected that the European Central Bank will unveil a vast bond-buying programme this week aimed at kickstarting growth, which has put pressure on the euro.
"The central bank is reacting to the strong krone. Probably not the last cut," Danske Bank economist Steen Bocian wrote.
On Thursday, the Swiss National Bank (SNB) removed the cap of 1.20 francs to the European single currency, prompting the Swiss franc to surge 30 percent against the euro minutes after the announcement.
Denmark's monetary policy is aimed at maintaining a stable exchange rate between the Danish krone and the euro.
The krone is pegged to the euro through an agreement known as the European Exchange Rate Mechanism (ERM II), under which the Danish currency can move only 2.25 percent up or down from a fixed rate of 7.46 krone per euro.
The deposit rate is the rate at which commercial banks are paid, or in this case have to pay, to place funds at the central bank.

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Danish central bank says speculators boosted profit

Denmark's central bank (Nationalbanken) on Wednesday said a big chunk of its profits last year came from battling speculators who bet it would abandon the krone's peg to the euro.

Danish central bank says speculators boosted profit
Lars Rohde presented the central bank's 2015 results on Wednesday. Photo: Nikolaj Linares/Scanpix
The central bank said it made a profit of 3.6 billion kroner last year ($534 million, €483 million), out of which 2.2 billion kroner came from “the pressure on the krone in early 2015”.
The Scandinavian country adopted a fixed exchange rate to the Deutsche Mark in 1982, and adopted a similar policy towards the euro since the creation of the single currency in 1999.
When Switzerland unpegged the Swiss franc from the euro on January 15th, 2015, prompting it to soar in value, speculators believed Denmark would follow suit with the krone.
But when their interest faded, the central bank bought back the currency at a slightly lower exchange rate than at which it was sold.
“To this should be added substantial interest income resulting from the reduction of deposit rates to -0.75 percent,” the central bank wrote in its annual report.
Sydbank analyst Jacob Graven said the result was a sign of “hysteria among investors.”
“There was no reason to believe that the central bank would lose the krone war, because (its) coffers are inexhaustible,” he wrote in a note to investors, referring to the central bank's capacity to create unlimited amounts of kroner to keep a lid on the currency's appreciation.
A quarter of the total profit, which included income from investments, was transferred to the government.
On a more sombre note, the central bank lowered its Danish growth forecast for this year by half a percentage point to 1.3 percent.