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December 16th, 2011

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In an attempt to weaken the Danish krone, which has been gaining strength against the euro, DenmarkÂ’s central bank, Nationalbanken, decided on Thursday to lower the lending rate another 0.1 percent to a record-low of 0.7 percent.

The national interest rate is now approximately 0.30 percent below the European rate.

SydbankÂ’s senior economist, Jacob Graven, suggested that the central bank was running out of options for stabilising the krone against the euro.

“If the krone continues getting stronger than the euro, and the interest rate hits zero, Nationalbanken will have used up all of the traditional ammunition for securing the fixed exchange rate policy,” Graven told Politiken newspaper.

Graven added that if the latest rate reductions fail to have a braking effect, Nationalbanken could lower the interest rate to zero – or might try something more creative, such as printing money to weaken the Danish krone, or breaking its fixed exchange rate with the euro. The krone has been pegged to the euro at a rate of 7.45 kroner to one euro since 1999.

Foreign investors have been buying Danish government bonds at a brisk pace – to the tune of 69 billion kroner since September – on the presumption that the Danish economy is a ‘safe haven’ from the troubled Eurozone.

Another senior economist, Jens Nyholm from the bank Spar Nord, predicted that the Danish base interest rate would fall to 0.45 percent in January. But there’s no reason why it must stop there.

Nationalbanken’s chairman, Nils Bernstein, would not rule out the possibility that the national interest rate could even go below zero – a situation Sweden experienced between July 2009 and September 2010, when its interest rate fell to –0.25 percent.

A negative interest rate would force banks to circulate their money, explained economics professor Henrik Jensen from the University of Copenhagen.

“You can very well have a situation where Nationalbanken would put a negative interest on deposits from the country’s banks,” he told Politiken. “Then the interest is simply minus, so the banks get penalized for letting money sit in Nationalbanken.”

Danske BankÂ’s senior economist Steen Bocian told Avisen.dk that a near-zero national interest rate could translate into savings for Danish homeowners.

“Fundamentally, it means that it will be cheaper to loan money,” Bocian said. “Even though we are dealing with trifles here, it could produce some small savings with, for example, the variable rate mortgages. So, it could be a little bit easier to be a home owner or business owner.”