Denmark just announced a surprise interest rate cut, pushing the country’s main policy rates further into negative territory.
Both the deposit and lending rates were cut from -0.05% to -0.2%.
Like Switzerland, Denmark has been trying to keep up a currency peg against the euro, at around 7.46 Danish kroner to the euro.
Switzerland’s central bank caused currency chaos last week, when it unexpectedly ended the peg and the Swiss franc soared in value. Since then, analysts have questioned whether Denmark will have to follow.
Societe Generale’s FX man, Kit Juckes, thinks that’s overblown (emphasis ours):
There has been significant speculation about the Danish currency peg to the euro following the SNB (Swiss National Bank) shock. We are doubtful that the Danish krone peg, which has existed for decades, is about to break. The DKK (Danish kroner) remained within the ERM (exchange rate mechanism) during the 1992 European currency crisis, even as the pound and the lira abandoned it. Unlike the CHF (Swiss franc), the DKK is not generally regarded as a global safe haven currency. Danish foreign reserves have actually declined by some 13% from their peak in mid-2012 after the passing of the European sovereign crisis, which implies a weakening of the pressure on DKK in recent years.
But like Switzerland, Denmark is importing deflation from the eurozone. Prices rose by just 0.3% in December, and there’s going to be continued pressure on Denmark so long as the currency union’s sluggish economic outlook continues, and with a likely QE programme coming on Thursday.
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