March 19, 2020 / 4:28 PM / 20 days ago

UPDATE 2-Denmark's central bank raises key interest rate

(Adds details)

COPENHAGEN, March 19 (Reuters) - Denmark’s central bank on Thursday raised its key interest rate to -0.60% from a record low in a surprise move to ease downward pressure on the Danish crown, which is pegged to the euro.

The rate hike comes just as other central banks lower rates to bolster their economies amid the coronavirus outbreak.

EU member Denmark conducts a fixed exchange-rate monetary policy to keep its currency steady within a narrow band against the euro, and the central bank changes interest rates for the sole purpose of carrying out that mandate.

The certificate of deposit rate was raised by 15 basis points to -0.60% from a record low of -0.75%, while all other interest rates were left unchanged, the central bank said in a statement.

“The Danish crown has been to the weak side against the euro for a long time ... The last days’ financial turmoil has intensified the pressure and the central bank now acts with a rate hike,” said Danske Bank’s chief economist Las Olsen.

The move follows recent selling of foreign currency to keep the crown stable, the bank said.

The Danish crown barely moved on the news, trading at 7.473 to the euro, largely in line with the level it has traded at since late last year when the central bank started intervening.

The bank has intervened in the foreign exchange market for the past five months to keep the currency stable against the euro.

“This might seem like a paradox at a time when central banks are opting to cut interest rates to give a economic boost to economies hit by coronavirus,” said Jeppe Juul Borre, chief economist at Arbejdernes Landsbank.

“But the rate hike comes as a result of weakening pressure on the crown and not to tighten monetary policy as such,” he said.

Nordea’s chief economist Helge Pedersen said the rate hike was partly due to a recent substantial widening of Danish mortgage bond spreads and the massive sell-off of these by investors. He also noted the Danish central bank had difficulty selling government bonds at its most recent auction.

“This is a direct consequence of the recent market turmoil and the flight into cash, which we have seen among investors on a global level,” Pedersen said.

Rates on mortgage bonds, which steadily declined to record lows throughout last year, have in just under a week risen to heights not seen in 10 months, causing mortgage lenders to reopen a series of 30-year mortgage bonds with a yield of 1.5%, up from 0,5% previously. (Reporting by Jacob Gronholt-Pedersen, Stine Jacobsen and Nikolaj Skydsgaard; Editing by Alex Richardson and Jon Boyle)

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