Danish Central Bank Reduces Rate Premium Versus ECB
March 5, 2009
The Danmarks NationalBank met the ECB rate cut of 50 basis points and expanded it by another 25 basis points. The central bank 1-week CD rate accordingly fell to 2.25% from 3.0%, narrowing the premium relative to the ECB refinancing rate of 1.5% to 75 basis points. The latitude to do this reflects a softer euro tone, not growing confidence in the krone or Denmark’s economy.
A referendum of Danish voters rejected joining the common currency many years ago, but a decision was made to shadow the euro. Denmark in essence substituted an exchange rate target for an independent monetary policy. When the euro was soaring against the dollar a year ago, Denmark’s central bank faced a depletion of reserves and responded by sharply widening the rate premium with Euroland from 25 basis points prior to May 2008 to 175 basis points by the end of October. At that time when the ECB refinancing rate was 3.75%, the Danish rate stood at 5.5%. A unilateral Danish rate cut on December 19th of 50 basis points, plus cuts of 75 basis points each on January 15th and today, when the ECB cut by just 50 basis points each, has shaved the Danish rate premium from 175 basis points at peak to 75 basis points now. Unless the euro appreciates sharply against the dollar, Danish officials should get an opportunity in the future to cut the rate spread additionally, as such remains wider than its historic norm.
Copyright 2009 Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Euro
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[…] April 2, 2009 · No Comments Denmark’s central bank subordinates any notion of independent monetary policy to the goal of a stable krone against the euro. It does this by maintaining a premium of its key rate to the ECB rate. That premium was only 25 basis points a year ago but swelled to 175 basis points when upward general pressure on the euro spilled over into the krone cross. The reversal of the euro’s fortunes against the dollar last summer eventually enabled Danish officials to trim the rate premium in a number of incremental moves. When the ECB cut rates by 50 basis points in early March, for instance, Danish rates were reduced by 75 basis points, cutting the premium to 75 basis points. Today, however, Dansmarks Nationalbank only matched the ECB. Denmark’s key rate becomes 2.0%, still 75 basis points above the ECB refinancing rate of 1.25%. For further background on Danish monetary policy, see the my review of last month’s rate reduction. […]