May 24, 2012 / 2:46 PM / 8 years ago

UPDATE 2-Denmark cuts interest rates to dampen crown

* C.bank cuts lending rate to 0.6 pct from 0.7 pct

* Also cuts secondary rates

* Rate cut follows intervention to weaken the crown

* Analysts expect further cuts (Adds details, quotes, crown exchange rate)

By John Acher

COPENHAGEN, May 24 (Reuters) - Denmark cut interest rates to a record low on Thursday to tame its crown currency, which has been driven up by demand for non-euro assets as investors seek to weather the debt crisis, but analysts said more cuts would be needed.

The Nationalbank, which runs a fixed exchange-rate policy aimed at keeping the crown steady within a band against the euro, lowered its key lending rate to 0.6 percent from 0.7 percent, where it had been since mid-December.

The crown has risen to five-month highs recently, back to levels where the bank last trimmed rates before the European Central Bank began pumping cheap long-term funds into the financial system, as investors diversify into non-euro securities including Danish bonds, whose yields are at record lows.

“The low rates are a consequence of Denmark having become a safe haven in the European debt storm,” BRFkredit senior economist Mikkel Hoegh said in a note to clients.

Nordea senior analyst Jan Storup Nielsen said: “Today’s rate reduction follows intensive (strengthening) pressure on the crown in recent days when it was briefly traded all the way down to around 7.43 to the euro.”

The crown was little changed after the move, softening only slightly to 7.4315 to the euro by 1539 GMT from 7.4311 before the bank’s announcement.

Danske Bank senior analyst Morten Helt said: “Today’s rate reduction reflects increased foreign demand for Danish crowns in connection with growing concerns about an eventual Greek euro exit.”

Others also said that worries about Greece possibly leaving the euro were at the root of the crown’s strength.

Helt said he expected the Nationalbank to shadow the European Central Bank with a further 0.25 percentage point cut to 0.35 percent in connection with the ECB’s June 6 meeting, which would take the lending rate to just half of what it was before Thursday’s cut.

The Danish central bank tends to move in lock-step with the ECB but also acts independently to weaken or bolster the currency in line with its mandate.

The Nationalbank, which does not explain rate changes, used its standard formula for saying it had been intervening in the market to weaken the crown. “The interest rate reduction follows (the central bank’s) purchase of foreign exchange in the market,” it said.

The bank intervenes, buying or selling crowns for foreign currencies, to boost or soften it and maintain its peg to the euro. If such intervention lacks teeth, the bank changes rates.

MORE NEEDED

Sydbank chief economist Jacob Graven said the rate cut was entirely consistent with the Nationalbank’s policy.

“However, it is highly questionable whether the rate cut is enough to prevent further strengthening of the crown,” Graven said, adding that investors sought a safe haven in Denmark.

“Everything indicates that will also be the case in the coming weeks, when uncertainty about Greece will continue to be great,” he said. “It is therefore far from excluded that the Nationalbank in the coming weeks may cut interest rates further.”

European Union member but euro outsider Denmark’s policy of holding the crown steady against the euro means that the central bank shifts interest rates for the sole purpose of keeping the crown around its central parity of 7.46038 per euro.

Under the ERM II system, the crown is permitted to fluctuate by plus or minus 2.25 percent around that parity, and therefore between 7.29252 and 7.62824 per euro, though in practice the central bank keeps an even tighter range.

The Nationalbank also cut its certificates of deposit (CD) rate by 10 basis points to 0.20 percent and lowered its current account rate by 10 bps to 0.15 percent. (Additional reporting by Teis Jensen and Ole Mikkelsen; editing by Stephen Nisbet)

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