Danish Inflation Frustration Boils Over to Spark Euro-Peg Debate

Christian Wienberg
·1 min read

(Bloomberg) -- In Denmark, frustration over the central bank’s inability to respond to surging prices has sparked the first real discussion in at least three decades about the krone’s peg to the euro.

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The Nordic country’s central bank has no inflation mandate, instead focusing on keeping its currency tied to the euro in a tight band with the ultimate goal of ensuring economic stability. That’s worked well when prices hardly moved.

But now, “the surge in inflation has triggered more debate about the peg of the krone to the euro than we have seen in a generation,” Las Olsen, Danske Bank A/S’s chief economist, said in a research note on Friday.

Denmark’s inflation rate is now at 10.1%, the highest since around the time the peg was introduced four decades ago. In recent months, some Danish economists, think tanks and a former government minister have argued that there should be a discussion about whether the fixed-exchange-rate policy is still the right choice.

Olsen at Danske Bank says he thinks Denmark will opt to keep its peg, given the current monetary policy is backed by a majority of academics, government officials, politicians as well as the central bank itself.

“We’re far away from a change in mainstream opinion and a change in policy is highly unlikely, in our view,” Olsen said, adding he doesn’t think “that the inflation outcome in Denmark would have been substantially different if Nationalbanken had had an inflation target rather than an exchange-rate target.”

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