Denmark cuts rates to keep euro peg

COPENHAGEN• Lars Rohde, the governor of Denmark’s central bank, addressed speculators in what he said was a verbal intervention designed to stamp out any lingering doubts that he can preserve the krone’s peg to the euro.

After cutting the benchmark deposit rate for a fourth time this year, matching Switzerland’s key rate of minus 0.75%, Mr. Rohde said Thursday he’s ready to do more to prevent the “unthinkable” outcome that Denmark might lose its euro peg.

There is no limit to how low rates can go and how large foreign-currency reserves can grow, Mr. Rohde said. “The message is that if it’s not enough, we will do even more,” he said. “Either we can expand our balance sheet or we can go deeper into negative territory with the interest rates. That is a possibility and no one should try to outguess us here.”

Denmark has resorted to an unprecedented palette of measures to prevent the krone appreciating, including raising foreign reserves by a record US$16.3 billion last month to about 30% of gross domestic product and suspending government bond sales to drive down longer yields. Speculation against the bank’s ability to preserve its currency regime grew after the Swiss National Bank abandoned its euro cap and as the European Central Bank embarks on an unprecedented bond-purchase program.

Denmark’s swelling currency reserves aren’t a reason for concern, Mr. Rohde said.

“We can go on forever,” he said. “Our interest rates are more negative than the interest rates abroad, so we can for example invest in euro-denominated bonds, short-term bonds, and we will still have a carry.”

Other measures the central bank is looking into include direct purchases of government bonds and even mortgage bonds, Mr. Rohde said.

The extreme policy measures to date have driven down Danish yields, forcing banks to rethink their operations as they struggle to adjust to negative rates. The country’s mortgage banks met with the government Thursday to discuss a potential unified industry response to the rate climate.

Yields on Danish government bonds are negative for all maturities as long as five years, while mortgage bond yields trade below zero for maturities as long as three years.