Denmark cuts deposit rate further below zero

Denmark's central bank cut its deposit interest rate further Thursday and said there was "no upper limit" to its foreign currency interventions aimed at defending the krone's link to the euro.

Denmark cuts deposit rate further below zero
Nationalbanken's Lars Rohde. Photo: Jens Nørgaard Larsen/Scanpix
Nationalbanken cut the deposit rate — for the fourth time in less than three weeks — by 0.25 percentage points to -0.75 percent but left its lending rate unchanged at 0.05 percent.
On January 19 the deposit rate, which was cut to below zero in September for the first time since 2012, was reduced to -0.2 percent from -0.05 percent. Two further cuts followed on January 22 and 29.
"The fixed exchange rate policy is an indispensable element of economic policy in Denmark… Danmarks Nationalbank has the necessary instruments to defend the fixed exchange rate policy for as long as it takes," says the bank's director Lars Rohde.
"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," he added.
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.
On Tuesday the bank announced that it has spent 106.3 billion kroner ($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 market should soon get convinced that the currency peg is carved in stone," Helge Pedersen, chief economist at Nordea Bank commented on Twitter.

Some speculators have bet on the possibility of Denmark abandoning its policy of shadowing the euro in the wake of the turbulence caused by the ECB's aggressive monetary policy and Switzerland removing its cap of 1.20 francs to the European single currency.
Prime Minister Helle Thorning-Schmidt has said she has "full confidence that the National Bank will keep its fixed exchange rate policy".
On Thursday the central bank director said its recent moves have strengthened the country's monetary position.
"The revenue of Danmarks Nationalbank is positively affected by the increase of the foreign exchange reserves," he said.
Denmark has since the 1980s pegged the krone to limit exchange rate volatility. While Danes voted not to join the euro, the krone has since 1999 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.

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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.