The central bank cut rates three times in January to keep up with the sliding euro. Photo: Jens Astrup/Scanpix
Prime Minister Helle Thorning-Schmidt voiced confidence Tuesday that Denmark's central bank would be able to defend the krone's peg to the euro.
"I have full confidence that the National Bank will keep its fixed exchange rate policy… I do not doubt it for a second," Thorning-Schmidt told parliament.
While Danes voted not to join the euro, Denmark has since the 1980s pegged the krone to limit exchange rate volatility.
Since 1999 the krone has not been allowed to deviate by more than 2.25 percent from a fixed rate of about 7.46 krone per euro.
Switzerland's decision to remove its peg to the European single currency has made Denmark the last remaining European currency linked to the euro. With the value of the euro sliding due to European Central Bank's decision to inject massive amounts of liquidity into the eurozone economy through a bond buying programme, the Danish central bank has had to take radical measures to defend the krone's exchange rate.
The central bank has cut its deposit interest rate three times between January 19th and 29th, bringing it down to -0.50 percent.
On Tuesday the bank announced that it has spent 106.3 billion krone ($16.36 billion, 14.3 billion euros) — almost six percent of the country's GDP — on foreign exchange in an attempt to bring down the value of the Danish krone.
The unprecedented intervention "breaks all records" for Denmark, according to Peter Bojsen Jakobsen, an economist at Sydbank, adding that the action reveals the determination of Danish authorities.
"We believe that the fixed exchange rate policy will most likely survive the current situation just as it survived earlier financial crises, IT and housing bubbles and currency crises," he added.
The central bank's actions have also led to exceptionally low lending rates with the country's largest commercial bank Danske Bank offering mortgages at 1.5 percent over 20 years.