Danish National Bank Leaves Rates Unchanged

October 8, 2008

The Danmarks NationalBank did not match the ECB rate cut, departing from its pattern of matching all eight ECB rate increases between December 2005 and June 2007.  Denmark does not run an independent monetary policy.  Although not a member of the European Monetary Union, Denmark instead targets a fixed parity of the krone against the euro.  The krone cross rate stands currently at 7.456 per euro.  Because of the upwardly creeping ECB marginal repo rate since mid-September caused by frozen money markets, the Danish-Euroland interest rate spread had sunk into the red, promoting capital outflows and requiring Danish currency market intervention to defend the krone’s parity.  In mid-May, the central bank had bumped its lending and CD rates 10 basis points higher to 4.60%.  Then yesterday the Danmarks National Bank raised such by an additional 40 basis points to 5.0% and also lifted its discount rate by 25 basis points to 4.50%.  The combined May and October increases of 50 basis points, plus the ECB’s cut of 50 basis points, represents a shift of 100 basis points.  Danish officials will now see if that adjustment is sufficient to stabilize the krone without need for continuing intervention.  It might prove to be more than is required, and if the krone now begins to creep higher against the euro, Danish monetary officials will welcome the opportunity to replenish currency reserves.  When the ECB cuts rates again, if krone intervention has not been necessary, the old pattern of Denmark moving in lockstep with the ECB is likely to reappear.



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