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By Anirban Nag and Marc Jones
LONDON, March 12 (Reuters) - Denmark’s central bank governor said on Thursday that Danish policymakers are yet to find a “lower bound” for interest rates, and he vowed to do whatever it takes to defend the country’s three-decade old currency peg.
Governor Lars Rohde told a event held by the Official Monetary and Financial Institutions Forum that the Danish crown was not “undervalued”, having upped the ante in the past few months to ward off upward pressure on the currency. The crown’s value rose as the euro, to which it is pegged, began to slump.
“There is a lower bound for interest rates, but we haven’t found it yet,” Rohde said at the conference held by OMFIF, an independent research group. He said that rates could go very low if it was just for a short time but could not remain there for a lengthy period.
Last month, the Danish central bank cut its benchmark rate to -0.75 percent, bringing it in line with Switzerland’s, the lowest in the world.
It undertook a series of rate cuts in January and early February to stave off upward pressure on the crown, which hit highs of 7.43 crowns to the euro in mid-January.
That rise in the crown came after the Swiss central bank unexpectedly removed its cap on the value of the franc against the euro, prompting speculation that Denmark would follow suit.
Denmark is a member of the European Union member but does not use the euro. However, it keeps the crown within a 1 percent range around a central parity rate of 7.46038 crowns per euro, although under ERM-II exchange rate rules it is allowed a wider 4.5 percent band.
Rohde also borrowed European Central Bank chief Mario Draghi’s famous words, saying that Denmark was ready to do “whatever it takes” to defend the peg.
The central bank has been selling crowns in the foreign exchange market to help weaken the currency, which has been straining against the upper end of its range to the euro. By buying foreign currency, it has boosted reserves by 65 percent since the start of the year.
Denmark’s foreign exchange reserves grew to an all-time high after the central bank spent $25 billion in February to defend the peg to the euro.
Its reserves are now at 40 percent of the country’s annual economic output. Switzerland’s were at 80 percent when it abandoned its cap on the franc. (Reporting by Anirban Nag and Marc Jones; Editing by Larry King)