Denmark Raises Main Rate Half a Point to 5.5% to Boost Krone

By Tasneem Brogger

Oct. 24 (Bloomberg) -- Denmark's central bank unexpectedly raised the benchmark lending rate by half a percentage point to an eight-year high, showing policymakers will defend the krone even as the economy teeters on the brink of recession.

Copenhagen-based Nationalbanken lifted the rate to 5.5 percent, it said today. The bank's mandate is to keep the krone pegged to the euro in a 2.25 percent band. In the past week, the krone slid 0.1 percent and on Oct. 13 fell as much as 0.7 percent.

Danish mortgage rates are rising as the economy faces a contraction, with unemployment forecast to double in the next two years. House prices have fallen for three consecutive quarters and dropped an annual 5.2 percent in the three months through September. Consumer confidence plunged to the lowest in 19 years this month, the statistics office said today.

``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.''

The krone slipped 0.05 percent against the euro to 7.4623 as of 12.25 p.m.

The benchmark index of Denmark's 20 most-traded stocks dropped 7.4 percent as of 11:57 a.m. in Copenhagen. The yield on the 4 percent bond due November 2017 jumped 0.11 of a percentage point to 4.35 percent. The yield on Germany's 4.25 percent bond due July 2018, by comparison, slipped 0.07 of a percentage point.

`Raise Again'

``The krone has actually fallen slightly since they raised rates this morning, so they may have to raise again,'' said Jacob Graven, chief economist at Sydbank A/S in Aabenraa. ``One can't rule out an increase as early as today, or possibly in the coming days. Additional increases may well be larger than half a point.''

Denmark is raising rates as Nordic neighbors Sweden and Norway cut borrowing costs to support growth. Sweden yesterday cut the benchmark rate by a greater-than-expected 0.5 of a percentage point to 3.75 percent, the second reduction in two weeks. Norway on Oct. 15 also lowered key rate by half a point to 5.25 percent.

Today's Danish rate increase tracks moves in other economies defending small currencies, such as Hungary, which raised the benchmark by 3 percentage points to 11.5 percent on Oct. 22.

By raising rates today, the central bank is showing ``they don't want to go anywhere near the outer limits of the target range,'' Graven said. ``they want to establish long-term credibility.''

Sole Mandate

Denmark became the first European economy to enter a recession after reporting two quarters of contraction in the three months ended March 31. The economy returned to growth in the second quarter, expanding 0.4 percent.

Gross domestic product will shrink 0.2 percent this year and 1.4 percent in 2009, according to Deutsche Bank AG. That will send the budget from a surplus of about 3 percent of GDP this year to a 1 percent deficit in 2009, Deutsche Bank estimates.

Nationalbanken's mandate is to keep the krone pegged to the single currency within 2.25 percent of 7.46038 per euro.

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;