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UPDATE 2-Denmark cuts CD rate to curb crown, main rate held

Published 05/26/2010, 11:22 AM
Updated 05/26/2010, 11:23 AM

* Denmark's Nationalbank cuts CD rate by 10 bps to 0.50 pct

# Keeps main policy rate, the lending rate, at 1.05 pct

* Cuts current account rate by 10 pcts to 0.40 pct

(Adds quotes, background)

COPENHAGEN, May 26 (Reuters) - Denmark's central bank cut its certificate of deposit rate by 10 basis points to 0.50 percent to curb the strength of the crown, but kept its main policy rate unchanged on Wednesday.

The reduction came exactly a week after the Nationalbank's last 10 bps cut in the CD rate to curb the crown.

"The rate reduction is a consequence of purchases of foreign exchange in the market," the Nationalbank said in a statement, using its usual formula for saying it has been intervening to curb the crown.

It kept its main interest rate, the lending rate, steady at 1.05 percent, but the bank trimmed its current account rate -- another secondary rate -- by 10 bps to 0.40 percent.

Danske Bank foreign exchange analyst John Hydeskov said in a note to clients: "The crown has in the past few days had further tailwind as many investors have fled to Danish shares which are seen as a good shelter from the current financial woes in the markets."

The bank changes interest rates for the sole purpose of keeping the crown within a narrow band to the euro, but big inflows of foreign currency into the crown have driven the currency up in recent months.

"The rate cut comes just a week after the Nationalbank had to make a similar move to reduce the benefit of holding crowns compared with euros," Hydeskov said.

"That was apparently not enough and so now the Nationalbank needs to again adjust its rate levels. The rate cut is no surprise in the market," Hydeskov added.

The crown was virtually unmoved by the rate cuts, trading at 7.4401 to the euro at 1435 GMT, flat at the same levels visited just before the announcement.

EU member but euro zone outsider Denmark runs a fixed-exchange-rate policy, which aims to keep the crown within a plus/minus 2.25 percent fluctuation band around a central rate of 7.46038 crowns to the euro. In practice the band is tighter.

It was the 18th cut in the Nationalbank's CD rate since it began cutting from a peak of 5.50 percent in November 2008, though it has held the lending rate steady since mid-January when it took the spread to the euro zone's official rate to a record narrow 5 basis points.

"Today's rate cut brings Danish monetary policy closer to euro zone monetary policy but it's not entirely there," Hydeskov said.

"As long as rates are higher on Danish crowns there will be a certain inflow of foreign exchange into Denmark, since the Nationalbank has also showed they want to keep the EUR/DKK close to or slightly below the central parity and has thereby reduced the foreign exchange risk considerably," he said.

"The crown has in the past few days had further tailwind as many investors have fleed to Danish shares which are seen as a good shelter from the current financial woes in the markets," Hydeskov added.

(Reporting by Anna Ringstrom and John Acher; editing by Ron Askew)

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