February 5, 2015 / 3:36 PM / 4 years ago

UPDATE 2-Denmark cuts interest rate for fourth time in three weeks

(Adds central bank chief’s comment, crown movement, political support, analyst, background on Swiss rate)

By Ole Mikkelsen and Sabina Zawadzki

COPENHAGEN, Feb 5 (Reuters) - Denmark’s central bank cut its key policy rate on Thursday for the fourth time since its Swiss counterpart shocked markets by scrapping the franc cap three weeks ago and vowed again to defend the crown’s peg to the euro.

The cut of 25 basis points to -0.75 percent was bigger than previous cuts of 15 basis points each and brought the rate into line with that in Switzerland.

Analysts had expected such a move to discourage investors from switching into Danish from Swiss assets and pushing the crown out of its tight trading range to the single currency.

In a rare statement released by the central bank, Governor Lars Rohde said the peg “is an indispensable element of economic policy in Denmark — and has been so since 1982”.

“The Danish National Bank has the necessary instruments to defend the fixed exchange rate policy for as long as it takes. There is no upper limit to the size of the foreign exchange reserve,” he added, a reference to recent currency market interventions.

Rohde later told television channel TV2 that Denmark would not need European Central Bank help to maintain the peg.

“Now we are dependent on selling the crown. We can happily produce those (crowns) in unprecedented quantity. Therefore, we do not need help from anyone,” he said.

Smiling and appearing relaxed, Rohde said the central bank had other tools to manage the currency but that it was its privilege to keep these measures to itself before using them.

Under the Exchange Rate Mechanism (ERM2), Denmark must keep the crown within 2.25 percent of a rate of 7.46038 per euro, although in reality it has kept to a much tighter range of plus or minus 0.50 percent.

There are no signs so far that widespread political and business backing for the fixed currency policy is weakening.

“I don’t doubt for a second that it (the central bank) will maintain the fixed exchange rate policy,” Prime Minister Helle Thorning-Schmidt said earlier this week.

Investors flocked to Danish assets after the Swiss National Bank abandoned the franc cap and cut its main interest rate to -0.75 on Jan. 15, with the ECB’s announcement a week later of a trillion euro bond buying scheme further pressuring the crown.

As well as cutting rates, the central bank spent over 100 billion Danish crowns ($15 billion) intervening in the foreign currency markets in January. Because it is selling crowns to buy foreign currencies, that builds up its reserves.

Last week, the central bank said the finance ministry would suspend government bond issuance as another way of reducing demand for the crown and forcing down yields on existing debt, which again should make Danish assets less attractive.

The crown dipped to 7.4480 per euro from around 7.4462 before the rate cut before paring losses to 7.4441.

Analysts said the central bank’s action and statements underscored Denmark’s commitment to the peg and noted that a strong currency is easier to deal with than a falling currency, which costs in foreign reserves.

“Denmark is literally having a party that too many would like to attend,” Danske Bank Chief economist Steen Bocian said in a note to clients.

“However, there isn’t room for everyone and we are starting to put bad music on the system, dilute the good punch-bowl and demand payment at the door to avoid our party being overrun.”

$1 = 6.5154 Danish crowns Editing by Catherine Evans

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