A Decade of Negative Rates? Denmark May Be the First to Try It

(Bloomberg) -- The world’s longest experiment with negative interest rates may end up lasting an entire decade.

Not until 2021 at the earliest will Danes have a chance to see positive rates again, according to Danske Bank. The country’s policy rate first dropped below zero in 2012.

Danske Bank senior analyst Jens Naervig Pedersen says last year’s pattern of krone depreciation, which had some economists predicting rate hikes, won’t continue. In fact, he expects the Danish currency to appreciate in 2019. And with the central bank’s sole purpose being to defend the krone’s peg to the euro, a stronger exchange rate makes monetary tightening in Denmark less likely.

Nowhere else have people lived with negative interest rates as long as in AAA-rated Denmark. The policy has protected the currency peg, but it’s also turbo-charged the mortgage market and pushed those trying to save money into riskier assets. Meanwhile banks have done a bit less traditional lending and a lot more wealth management.

Read about the latest development in credit standards in Denmark

The jury is still out on the extent to which negative rates are a useful policy, especially in economies in which the central bank targets stable prices rather than fixed exchange rates. This week, former U.S. Treasury Secretary Lawrence Summers threw his hat into the ring, criticizing the policy because of its apparent failure to stimulate bank lending “due to a negative effect on bank profits.”

A Patient Bank

Even if the Danish krone does weaken this year, Pedersen says the central bank will be more patient with raising rates than it’s been in the past. That’s because the economic environment is uncertain and because the bank has a large stock of foreign currency reserves on which it can draw before needing to touch the interest-rate lever.

Danske predicts that any solitary rate increase would only come after central bank interventions of at least 50 billion kroner, or almost $8 billion, to support the Danish currency.

“We expect the krone to strengthen over the course of 2019 and the need for FX interventions to recede,” Pedersen said. Denmark’s benchmark deposit rate, now at minus 0.65 percent, won’t be raised until the end of this year, following an expected hike from the ECB, he said.

The Background:

• The Danish central bank has spent much of the past half decade trying to prevent investors hoarding kroner, most notably in early 2015 when it fought back a speculative attack that followed Switzerland’s decision to send the franc into a free float.
• Last year, economists started speculating the central bank would soon need to raise rates, after tighter monetary policy elsewhere and a smaller current-account surplus led to a weaker kroner. In December, the central bank bought almost $2 billion in kroner in its first such intervention in almost three years.
• The central bank defends a 2.25 percent band around an exchange rate of 7.46038 against the euro. In practice, it’s only tolerated moves within 0.1 percent, though economists have started speculating that the bank is now willing to live with a weaker krone.
• While Danske expects it to take a long time before Danish rates will rise, the prediction at Jyske Bank is for a 10 basis-point increase already this quarter.

To contact the reporter on this story: Nick Rigillo in Copenhagen at nrigillo@bloomberg.net

To contact the editors responsible for this story: Jonas Bergman at jbergman@bloomberg.net, Tasneem Hanfi Brögger, Christian Wienberg

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