World’s Longest Trial of Negative Rates Shows Lots of Positives

(Bloomberg) -- There was a time when people wondered what horrors might follow if central banks resorted to negative interest rates. But the country that’s tested the policy longer than any other has lately been enjoying one economic triumph after another.

The central bank of Denmark first drove its benchmark deposit rate below zero in 2012, in defense of the krone’s peg to the euro. Since then, savings have hit an all-time high, unemployment’s the lowest in almost a decade and government coffers are bulging. The country’s largest bank is also enjoying the biggest profits in its history and the property market is booming.

Since 2012, households’ assets (savings, properties and investments) have grown more than 20 percent to exceed $1 trillion at the end of last year, according to central bank data, as home equity and securities gained. Over the same period, household debt grew hardly at all, and now makes up about 134 percent of GDP, compared with 146 percent before 2012.

Denmark is home to the world’s biggest mortgage-backed covered-bond market, giving residents access to some of the cheapest home finance options on the planet. Banks offer bond-backed loans for a fixed rate of as little as 1.5 percent for 30 years. That’s half the rate the U.S. government pays. As a results, property prices have hit record highs.

With the economy ticking nicely, employment has shot up to its highest level ever. According to the statistics agency in Copenhagen, 2,728,800 people were employed in the country at the start of this year, 6,800 more than the previous record of April 2008. (The number corresponds to about 70 percent of the labor force, which isn’t a record.)

As Danes keep getting richer, thanks to asset gains, the government has a bigger base to tax. State income tax revenue jumped more than 23 percent to 535 billion kroner ($90 billion) from 2011 to 2017, leaving Denmark with a budget surplus of 1 percent last year. The deficit reached a 10-year low at minus 3.5 percent in 2012, when negative rates were introduced.

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