The Danish domino?

The Danish central bank has cut its deposit rate even deeper into negative territory as it fights to keep its currency peg against the euro steady ahead of an expected sovereign quantitative easing programme from the European Central Bank.

The Swiss National Bank last week threw in the towel on its currency ceiling versus the euro, heightening interest in Denmark’s longer-standing peg.

To lessen the attraction of depositing money in Denmark the central bank lowered its deposit rate from minus 0.05 per cent to minus 0.2 per cent, according to a statement from the bank.

It is wrong to claim that Switzerland and Denmark (and Cyprus?) are the first countries to leave the eurozone, but not uninstructive either.  There is more here, hat tip goes to my Twitter feed, and a bit more detail here.  This is further evidence that credibility, for central banks, is an international public good and thus arguably undersupplied.  And if the Danes cut their peg, I am loathe to call this a “mistake” (even though it likely will hurt their economy), rather it would be an inevitability.

Addendum: Scott Sumner comments.


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