Denmark’s krone is “well positioned” against the euro and its level doesn’t pose any concerns for monetary policy, according to the country’s central bank governor.
(Bloomberg) — Denmark’s krone is “well positioned” against the euro and its level doesn’t pose any concerns for monetary policy, according to the country’s central bank governor.
In an interview in Copenhagen, Nationalbanken chief Christian Kettel Thomsen appeared more at ease than his Nordic neighbors with the recent performance of the country’s currency. The krone has traded stronger than the central point of its peg against the euro for the past three years.
“We feel it’s located at a comfortable position at the moment,” he said. “The krone is well positioned in the band against the euro. It’s not far away from the central parity.”
While there’s been relative calm around the currency since a speculative attack on the peg in 2015, some economists have begun to wonder how the central bank might cope with sustained upward pressure on the krone in the long run, stemming from a large national current-account surplus.
Nationalbanken’s main monetary policy mandate is to guard it in a tight band against the euro. The krone’s appreciation has already prompted officials to raise rates by less than the European Central Bank on two occasions in the past seven months to weaken the krone.
The Danish currency’s strength contrasts with the weaker performance of Scandinavian neighbors. The Swedish krona and the Norwegian krone are among the three biggest decliners versus the dollar and the euro in the G-10 space of most traded currencies over the last 12 months.
Those losses have followed slower rate-tightening campaigns compared with the US Federal Reserve and the ECB, as well as growing global risk aversion. Sweden’s economic prospects have also been dented by a housing slump, while falling fossil fuel prices have reduced Norway’s windfall gains from exports.
Denmark’s fixed-rate policy
The central bank defends a 2.25% band around an exchange rate of 7.46038 against the euro, although in practice it sticks to a much narrower range. It intervenes in the currency market by buying or selling kroner and it adjusts the current-account rate to protect the krone’s peg.
In 2015, Kettel Thomsen’s predecessor, Lars Rohde, faced an onslaught from hedge funds speculating the krone’s peg would break after Switzerland dropped its cap on the franc. He succeeded by cutting the main rate to minus 0.75%, halting government bond sales and driving foreign currency reserves to a record 40% of gross domestic product.
While “different monetary policy regimes come with pros and cons,” the Danish system has served the economy well and has brought down inflation, Kettel Thomsen said. In practical terms, the country is “importing the ECB’s monetary policy,” he observed.
Even before its market showdown, Denmark was the global pioneer in introducing negative interest rates back in 2012. It became a testing ground for how sub-zero policy may affect an economy. At one point, even coupons on mortgages for homeowners went negative, and one result was that house prices rose faster than elsewhere.
The benchmark rate is now 2.85% after seven rate hikes over the past months, compared with 3.25% at the ECB.
While the governor declined to speculate when or if negative rates might return, they are now in the central bank’s “toolbox,” he said.
“They used to be something you only theorized about,” Kettel Thomsen said. “But they are there now and it’s a tool that we in Denmark know we can use if we want to address any turmoil around the krone.”
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