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By Peter Levring and Anna Ringstrom
COPENHAGEN, April 23 (Reuters) - The Danish Central Bank has few options on acting further to counter the global economic downturn, Governor Nils Bernstein said on Thursday, but analysts still expect it to cut interest rates more than the ECB.
Small and export-dependent Denmark, whose currency is pegged to the euro, has suffered a hard blow from the global financial crisis and is in recession.
"The Nationalbank's rate is historically low. Our further possibilities to act are limited," Bernstein said in the text of a speech published on the bank's website.
The Nationalbank usually let its key rate follow the European Central Bank's changes in the past, but last year it widened the premium substantially to defend the crown currency.
The gap peaked at 175 basis points in December as the Nationalbank fought to keep the crown within its band against the euro while investors fled to bigger and safer markets due to the deepening global crisis.
As investors began returning to Danish markets this year, foreign reserves rose again, allowing the central bank to narrow the rate gap to the current 75 basis points. Until May 2008, it had long been only 25 basis points.
The Nationalbank last cut its key one-week rate by 25 basis points to 2.0 percent in April, following a cut of the same size by the ECB the same day to 1.25 percent.
The ECB is widely expected to cut rates again, by 25 basis points to 1.0 percent, on May 7. [ECB/INT]
The Danish government has launched several stimulus measures in view of the financial crisis.
Bernstein said fiscal policy was appropriate and had been so for years. "Let's now bide our time and see whether all that has already been started will have (an) effect."
"It is crucial that all the extraordinary measures that are currently being taken to stimulate the economy don't increase long-tern inflation expectations," he said.
RATE CUTS
Analysts said they still expected Danish borrowing costs, and the gap over the ECB rate, to fall further.
"With the substantial rise in the currency reserves, and the fact there's no apparent financial markets worry that may hit the crown really hard, I maintain there is reason to believe they will cut rates," said Nordea economist Helge Pedersen. "I also believe there is reason to expect a narrowing of the gap."
Peter Skottegaard, economist at Jyske Bank, said he saw the rate gap narrowing to 35 basis points in the coming year.
"In the long run, it may narrow even more," he said. However, he added: "As long as economic conditions are uncertain smaller economies, such as the Danish, will have to keep a higher yield to keep investors interested."
The crown currency is pegged to the euro in a 2.25 percent band around a central rate of 7.46038
Nationalbanken is due to release foreign exchange reserve data for April on May 4. News the previous month that reserves were at a record high did not prompt the Nationalbank to cut interest rates, which surprised analysts.
Separately on Thursday, new Prime Minister Lars Lokke Rasmussen ruled out holding a vote this year on joining the euro zone. [nLN743931]
(Additional reporting by Teis Jensen and Ole Mikkelsen; editing by David Stamp)