Danish Central Bank Doesn't See Minus 0.75% as Lower Rate Limit

(Bloomberg) -- Denmark shares the record with Switzerland in boasting the world’s lowest policy interest rate -- minus 0.75%. But it would be wrong to assume any kind of limit has been reached, according to the governor of the Danish central bank, Lars Rohde.

“It is obvious that there is a limit for how low interest rates can be,” Rohde said in Copenhagen on Wednesday. “But we are the central bank with the most experience with negative interest rates and we still have not found the lowest possible rate.”

Denmark, which uses monetary policy to keep the krone pegged to the euro, has had negative interest rates longer than any other country after first driving its benchmark rate below zero in 2012. Rohde said on Wednesday that it will be a while yet before Danes can expect rates to go positive again, given the central bank’s obligation to track moves by the European Central Bank.

Rohde acknowledged that the lower interest rates go, the more “limited” their impact.

“I agree with the notion that the effect of monetary policy is limited globally,” he said in an interview. “Whether interest rates are minus 0.4% or minus 0.5% probably won’t change much for the economy. But we conduct monetary policy in consideration of the exchange rate. And here it has a clear influence.”

Denmark cut its deposit rate by 10 basis points on Sept. 12, following the latest stimulus measures by the ECB. Rohde said that, “as a general rule,” Denmark will always follow the ECB.

The negative-rate environment has drawn criticism from bankers who complain that their traditional business models are being upended. Denmark’s bank industry had hoped that a current-account facility that lets lenders park excess cash at a central-bank rate of 0% might be expanded, especially after the ECB introduced a tiering model. But Rohde rebuffed their pleas. He also questioned complaints by the pension industry that the current monetary climate discriminates against insurers.

“Most countries have a reason to have low or negative interest rates and the transmission mechanism goes between equity markets via the banking system,” Rohde said. “But it is true that it has consequences for pension savings.”

©2019 Bloomberg L.P.

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