Denmark’s central bank mirrored its European counterpart and added 25 basis points to its benchmark interest rate to support the krone’s peg to the euro.
(Bloomberg) — Denmark’s central bank mirrored its European counterpart and added 25 basis points to its benchmark interest rate to support the krone’s peg to the euro.
Nationalbanken, which doesn’t hold scheduled meetings, lifted its current account rate to 3.35% from 3.1%, it said in a statement on Thursday, matching the European Central Bank’s hike earlier in the day. The move by Nationalbanken was widely anticipated by economists polled by Bloomberg News, given the bank hadn’t intervened in the currency market in recent months and the krone is trading close to its central euro parity.
The Danish central bank, whose sole mandate is to maintain a fixed exchange rate, uses foreign currency interventions to steer the krone and typically only resorts to interest rate changes, for example by deviating from ECB rate decisions, if interventions become too big.
“The krone is currently a long way from the intervention levels, which is why Denmark’s central bank is keeping pace with the ECB,” Mathias Dollerup Sproegel, senior economist at Sydbank A/S, said in a note to clients.
The Danish currency has been relatively stable against the euro in recent months. In May, Nationalbanken’s chief, Christian Kettel Thomsen, told Bloomberg News the krone was at “a comfortable” level, given it’s “not far away” from its central euro parity of 7.46038.
The krone was little changed against the euro at 5:11 p.m. in Copenhagen.
Denmark has now raised borrowing costs nine times in the past year. The central bank has on two of those occasions increased its benchmark rate less than the ECB to help ease upward pressure on the krone, creating a 40-basis-point spread to the euro area key rate, which is now 3.75%.
Recent ECB Hikes and Danish Reaction
The Danish central bank uses its currency peg to achieve price stability. In June, Denmark’s inflation rate dropped for an eighth consecutive month to 2.5%, from a four-decade peak of 10.1% in October, reaching a level well below the euro area average.
“We expect interest rates at Nationalbanken and at the ECB have hit their peak with today’s increases,” Jeppe Juul Borre, chief economist at Arbejdernes Landsbank A/S, said in a note. “However, it’s not completely set in stone.”
(Updates with analyst comment from fourth paragraph.)
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