Danish Central Bank Also Eased More Today Than the ECB

January 15, 2009

The Danish Central Bank cut its key lending rate by 75 basis points to 3.0%, 25 basis points more than the ECB rate cut.  The Danes had eased twice in December, matching the ECB’s 75 basis point reduction on December 4th and doing another unilateral 50 basis points on on December 19th.  Denmark does not have an independent domestic monetary policy. Instead, officials target the krone within a very narrow band against the euro.  When the krone has to be defended as earlier in 2008, foreign currency reserves run down, and the premium on Danish interest rates is widened relative to rates in Euroland. The second cut in December and today’s larger-than-ECB reduction were explained in a statement released by Denmark’s Central Bank as warranted by a buildup of reserves. Denmark’s lending rate is now 100 basis points higher than the ECB refinancing rate.  The initial widening and subsequent narrowing of the rate premium suggests a recent erosion of the underlying buoyancy of the euro, which is also reflected in net 29 cent drop of the European common currency against the dollar since July.



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