Denmark's central bank defended the krone with a snap interest rate hike Friday as business leaders warned that the country's rejection of the euro would raise costs and lower competitiveness.
Moving to deter speculative attacks on the Danish currency a day after voters scorned the European currency, the central bank announced it was raising its benchmark repo rate from 5.1 percent to 5.6 percent.
The credit tightening instantly made it more costly to do business in Denmark but was meant as signal to financial markets that Danish monetary authorities were determined to maintain stability of the krone, analysts said.
"The decision to raise the rate was made to avoid uncertainty on the krone's exchange rate," bank spokesman Bjarne Skafte said.
Henrik Asmussen, a senior economist at Nykredit Markets, told AFP the rate hike was "more or less expected, so it succeeded in calming the entire market.“
The spread on bond yields was unchanged from Thursday's close while the krone had strengthened against the euro, he added.
Industry leaders in Denmark were clearly disappointed by the decision not to join the euro-zone, amid fears of seeing a fall in investments as industry flees to euro member countries and as the Copenhagen stock exchange risks being relegated to a back seat.
"It is really bad news. We are really disappointed because we will lose influence over our own matters," the deputy director of the Federation of Danish Industries, Joergen Hansen, told CNN.
Although Denmark is not a member of the common currency, its krone is pegged to the euro and is only allowed to fluctuate within a 2.25 percent margin of the common currency.
This means the Danish central bank must shadow the moves of the European Central Bank (ECB) in order to keep its currency within that margin. But it is not able to sit at the ECB table when key decisions on European financial policy are drawn up.
"We will not be part of the European Central Bank, and we will have to have a stricter fiscal policy in order to convince financial markets that we have a very tight link to the euro," Hansen said.
An editorial in the financial daily Boersen noted that because the Danish economy is currently flourishing, the 'no' vote was not a catastrophe in the short term. But an eventual downturn was inevitable.
"Danish companies will not flee the country immediately, but in the long term we will see slowed growth," it said, adding: "Growth will move abroad as Denmark wanders across the desert outside the euro zone."
Nonetheless, "as of today, Denmark will have to pursue its krone stability policy on more difficult terms. The situation is no longer status quo," it said.
Asmussen was less worried about Danish firms leaving the country and said it would take years for such a trend to develop, if at all.
"Some companies have threatened to move but we will have to see if that takes place in reality. The question is whether the benefits of joining the euro zone will outweigh the costs of moving," Asmussen said.
Boersen noted that while the 'no' vote was not enough to warrant a tightening of Danish financial policy, it would be costly to Danish industry.
"We will see that key indicators in the Danish economy, such as current account, growth and inflation, will be followed zealously both abroad and by the central bank and this could amount to a big bill for Danish industries and consumers," it said.
But former Conservative prime minister Poul Schlueter was dire in his outlook for Denmark outside the euro.
"We'll be poorer, we'll get less foreign investment and our international reputation will be damaged," he told the Financial Times -- COPENHAGEN (AFP)
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