No Limit to Negative Rates as Rohde Defends Danish Euro Peg

A year and a half after Denmark’s central bank cut its deposit rate below zero, Governor Lars Rohde says there’s no limit to the policy measures he’s ready to deploy to defend the krone’s peg to the euro.

“Paraphrasing Mario Draghi,” president of the European Central Bank, “I can just say we’ll do whatever it takes” to defend the peg, Rohde said in a Dec. 2 interview in Copenhagen.

Denmark’s options are under renewed scrutiny amid speculation the ECB may lower its rates. Citigroup Inc. estimates policy makers in Frankfurt will cut the euro area’s deposit rate to minus 0.1 percent by around June 2014, forcing the Danish central bank to follow with a cut to minus 0.2 percent to defend the currency peg. Rohde says the extreme measures have proved successful.

“Our experience with negative rates shows that it’s important that it’s been a marginal rate, which still made an impact in the money market,” he said. “Hence we achieved what we wanted through regulating the rate spread to the euro and the krone peg.”

ECB policy makers will probably keep rates unchanged at today’s meeting, according to a Bloomberg survey of economists. The bank cut its refinancing rate by a quarter of a percentage point to 0.25 percent last month. Denmark opted not to follow for the first time since October 2008, leaving its lending rate at 0.2 percent and its deposit rate at minus 0.1 percent.

Banking Costs

In neighboring Norway, the central bank cut its rate forecast today as property prices continue to decline and the economy slows. Policy makers in Oslo now don’t expect to start raising rates until the “summer” of 2015, a year later than previously signaled, according to today’s decision.

Denmark’s central bank, which uses rates together with currency reserves to target a krone rate of 7.46038 per euro, will be anchored in sub-zero territory by crisis measures taken by the ECB until 2015, according to economists at Danske Bank A/S, Sydbank A/S and the Danish unit of Svenska Handelsbanken AB.

While commercial banks have only placed 175 billion kroner ($32 billion) in the central bank’s deposit facility, the negative benchmark rate has dragged down the much larger krone money market, which has a daily turnover of about 140 billion kroner. Though some banks in the U.S. started charging clients to hold their Danish krone-denominated deposits, lenders in Denmark stopped short of resorting to such measures.

Extra Facility

Rohde said in May the lending rate can’t drop below zero. He has also said currency reserves were too low before the crisis.

To ease the cost of negative rates to the financial system, Denmark’s central bank has expanded a current account facility that pays a zero return. Even with the extra facility, Danish bank interest rate margins -- the difference between deposit and lending rates -- shrank in October to the lowest since January 2012, according to central bank data.

Rohde says Denmark’s experience with negative rates shows the policy doesn’t inflict undue pain on the financial industry.

“The Danish lesson is that it hasn’t transferred into household economies as we have not seen negative deposit rates at banks,” he said. “Another important lesson is that it didn’t impact bank’s profitability and subsequently pushed lending rates higher.”

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