Danish rate rise on the cards to defend Euro peg

 (Reuters) – A Danish interest rate hike may be coming, perhaps as soon as Thursday, after a European Central Bank meeting, analysts said after data showed the central bank used a record amount of its foreign reserves to prop up the crown within a euro peg.

Foreign exchange reserves dropped by a record 47 billion Danish crowns ($7.1 billion) in August, more than double than what had been expected by analysts, to 536.2 billion crowns.

The central bank intervenes to keep the crown within a tight band to the euro, its main policy goal. Analysts from Sydbank, one of five large Danish banks, believe reserves have been depleted to such a level that the central bank will have to resort to the tougher measure of a rate hike.

Sydbank expected the central bank to raise the certificate of deposit rate to minus 0.60 percent from minus 0.75 percent on Thursday, or in one week from Thursday.

"Denmark would then no longer be the co-holder of the world record in negative rates," macro economist Peter Bojsen Jakobsen said in a note to clients, referring to the fact that only the Swiss central bank has as low an interest rate as the Danish.

The central bank can change interest rates at any time but Thursdays at 1600 CET has traditionally been its preferred timing for rate changes. Usually, it acts in lockstep with the ECB but that has changed in the past year when the crown came under strong pressure to break out of the peg to the euro.

Economists at Denmark‘s other large banks see a Danish rate hike independent of an ECB move as less imminent. Nykredit predicted a hike in October, Danske Bank ‘during the autumn’, and Nordea ‘towards the end of the year’.

The central bank flooded the market with crowns at the beginning of the year to weaken the currency so it remained within the permitted fluctuation band to the euro.

In so doing, it built up its foreign exchange reserves to a record 737 billion crowns by the end of February and slashed rates four times.

The crown had been straining against the upper end of the band after the Swiss central bank unexpectedly removed the franc’s cap against the euro in mid-January, prompting speculations that Denmark would follow suit.

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Speculators eventually realised Denmark‘s decades-old peg would not give, and the crown hit a 14-year low in April. (Colombo/Sept03/2015)

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