Denmark Raises Main Rate Half a Point to Boost Krone

By Tasneem Brogger

Oct. 24 (Bloomberg) -- Denmark's central bank unexpectedly raised the benchmark lending rate by half a percentage point as the krone's peg to the euro grew more expensive.

Nationalbanken lifted the rate to 5.5 percent from 5 percent, the Copenhagen-based bank said today in a statement.

``In a climate in which the krone is under pressure, they need to react by raising rates,'' said Niels Roenholt, an economist at Jyske Bank A/S in Silkeborg, Denmark. ``But it's worrying in that it puts the Danish economy, not least mortgage holders, under even more pressure.''

Nationalbanken's sole mandate is to keep the krone pegged to the single currency in a 2.25 percent band on either side of 7.46038 per euro. In the past seven days, the krone has weakened 0.1 percent and on Oct. 13 fell as much as 0.7 percent. The rate increase means forecasts for economic growth will have to be revised down, Roenholt said. The economy will shrink 0.2 percent this year and 1.4 percent in 2009, Deutsche Bank AG says.

Today's move is the fourth time since February 2006 that the bank has changed rates independently of the European Central Bank. The bank last raised the rate on Oct. 7 by 0.4 of a percentage point to 5 percent.

The move was part of a ``continued intervention to support the Danish krone,'' the bank said in a statement.

Denmark is one of five members of the Exchange Rate Mechanism 2 and defends the tightest spread to the euro. The bank doesn't hold scheduled meetings and changes rates in response to currency swings that threaten its target.

To contact the reporters on this story: Tasneem Brogger in Copenhagen at tbrogger@bloomberg.net;