The world-record-holder in negative rates is Denmark, where the policy has been enforced for the better part of almost four years.
Economists tracking Danish rates have so far agreed policy will probably go positive by 2019. But as Britain’s referendum on exiting the European Union draws closer, the litany of risks entailed by a Brexit means that the consensus forecast may be too hawkish. Should the “leave” camp win, a new monetary experiment may begin.
Both Nordea, Scandinavia’s biggest bank, and Handelsbanken, say a U.K. exit from the EU would push Denmark even further away from positive rates. Its benchmark deposit rate may be cut below minus 0.75 percent, a record level the country maintained for most of last year, as demand grows for safe, AAA-rated assets like the krone, they say.
“Appreciation is the most likely outcome,” according to Jes Asmussen, chief economist at Handelsbanken in Copenhagen.
The central bank in Copenhagen would probably first resort to its main tool -- currency interventions -- to defend the krone’s peg to the euro. If those measures aren’t enough, it will need to cut rates, Nordea and Handelsbanken say.
“In the end, what happens will depend on the development in the euro area, and that ultimately depends on Brexit’s impact on European monetary policy,” said Helge Pedersen, chief economist at Nordea in Copenhagen. An obvious scenario is a surge in demand for haven assets, which would put pressure on Denmark to cut rates, he said.
Fourteen months ago, investors hoarded krone assets as they speculated Denmark would follow Switzerland in dropping its ties to the euro. After fighting them back, Governor Lars Rohde in January was able to raise the deposit rate to minus 0.65 percent.
But after a brief lull earlier this year, demand for the krone is already rising and the currency is now trading around the same strong levels that forced the central bank into crisis mode last year.
Asmussen says that, for now, an outcome that results in Danish rates going below minus 0.75 percent isn’t his main scenario. “But we live in a very unpredictable world, so I wouldn’t rule it out.”