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Denmark: The Danish central bank has bowed to pressure

2015/01/21

The Danish central bank has bowed to pressure and cut interest rates to a record low as currency speculators search for their next target next forcing Switzerland to abandon its defence of the franc.

The decision by Denmark’s Nationalbanken to cut its deposit rate from minus 0.05 % to minus 0.20 %, equal to the record low of 2012, as well comes ahead of the expected launch of the European Central Bank’s programme of quantitative easing this week — an initiative that would probably add to pressure on the krone.

Markets have been full of chatter about whether Denmark’s strict peg to the euro could be the next target of investors next last week’s move by the SNB to end its ceiling on the franc-euro exchange rate.

“The Danish central bank appears to have clarified the FX market’s next target — the euro-Danish krone peg,” said analysts at Citi.
Danish economists have underlined how Switzerland’s ceiling was always described as a temporary device while Denmark’s peg to the euro is the sole target for its central bank, which aims to keep the krone in a tight band with the single currency.

Denmark’s monetary policy is aimed at keeping the krone within 2.25 % on either side of the currency peg of DKr7.46 to the euro, but, in ­practice, the central bank has kept the fluctuations within a much narrower band.

Economists at Nordea warned that the Nationalbanken could cut rates again as early as Thursday if the ECB does launch a quantitative easing programme, which is tipped to include €500bn in bond purchases.

The ECB’s move would reduce interest rates on euro-denominated assets, forcing investors to search for higher yields abroad.
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