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Denmark surprises market with third rate cut in two weeks

The Danish central bank cut its key interest rate for the third time in two weeks to another historic low after intervening in the market to keep the crown within a tight range against the euro.

The central bank cut its certificate of deposit rate to -0.5 percent from -0.35 percent, making a reduction of 45 basis points since Monday last week.

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A Danish 2 kroner coin
Chris Ratcliffe | Bloomberg | Getty Images
A Danish 2 kroner coin

While analysts said last week that its actions might not be enough to weaken the crown, few expected another cut so soon, especially as Denmark's rate went below the eurozone equivalent of -0.20 percent, making it less attractive than the euro.

Analysts have said the central bank tends to use interest rate tools after spending 10 to 15 billion crowns in intervention.

"It has become expensive to have Danish crowns and the (upward) pressure is therefore expected to ease off, but whether the rate cuts are enough to turn off the 'stream' into the market is still uncertain," Danske Bank chief economist Steen Bocian said in a note.

The central bank has intervened every month since September, aside from December, as the crown has strained at the upper limit of its trading band with the euro.

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But crown buying accelerated after the Swiss National Bank scrapped the franc's cap against the euro. It also cut interest rates to -0.75 percent. Some analysts think the Danish central bank may have more cuts up its sleeve.

"The objective is to push down money market rates and make it less attractive to hold crowns," a bank spokesman said. "We expect a reaction so we don't need to intervene and the crown will weaken."

The crown, whose daily movements are generally tiny, weakened to 7.4452 per euro from 7.4440 before the cut, then recovered to trade at 7.4438.

Handelsbanken Chief Economist Jes Asmussen estimated the central bank had spent a record 100 billion crowns in January defending the peg to the euro.

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Under the Exchange Rate Mechanism, Denmark agreed to keep the crown in a corridor of 2.25 percent either side of of 7.46038 crowns to the euro. In practice, it has maintained a tighter range of 0.50 percent either side.

Immediately after the Swiss move, some in the market speculated the Danes would be next to drop their fixed currency policy, despite its popularity across the political and business spectrum.

Helge Pedersen, Global Chief Economist at Nordea Bank, said the Danish National Bank had in effect underscored Denmarks' "unwavering" commitment to the policy.

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