Danish Central Bank Only Matches ECB Rate Cut

April 2, 2009

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.

I suspect the Danish central bank’s caution today reflects some concern that the smaller-than-expected ECB rate cut could lead to a firmer tone in the euro.  If that doesn’t happen, Danish rates may be lower further later this month.

Copyright 2009 Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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