Half Decade of Negative Rates in Denmark Shows How Risk Spreads

  • Economists see negative Danish rates as far as models stretch
  • Distortions seen in housing, investing, banking as result

By 2017, Denmark will have had negative central bank rates for the better part of half a decade.

That’s according to economists at five of the country’s largest banks. No one polled sees Denmark raising its deposit rate above zero for the duration of their models, which run as far as the end of 2017. The key deposit rate, minus 0.75 percent since February, has been mostly negative since mid-2012.

Denmark’s interest rate experiment -- deployed to protect the krone’s peg to the euro -- offers an opportunity to explore the distortions that markets face when investors get stuck in an environment in which they pay for the privilege of lending. Here are some analyst observations on an economy operating against this monetary backdrop:

Anders Aalund, chief analyst at Nordea Bank in Copenhagen:

  • “When I went to school we learned that interest rates can’t go below zero. This
    general belief had the result that all systems in the economy were built on the
    premise of positive rates.”
  • “But we have to conclude that they can and that things still work.”
  • “We can conclude that the number zero is not a natural speed bump because all that matters for a rate is how it’s positioned relatively to other rates.”

Niels Rønholt, senior economist at Jyske Bank in Silkeborg, western Denmark:

  • “Concerns that negative rates would encourage the use of cash at a massive level have turned out to be unfounded.”
  • “For banks and the big funds, cash was probably never a realistic option because the amounts that they deal with would make it very expensive and cumbersome.”
  • “Consumers haven’t had to deal with negative rates on their deposit accounts so they have no reason to switch to cash either.”

Jes Asmussen, chief economist at Handelsbanken in Copenhagen:

  • “Negative rates have created systemic risks because banks and other investors may seek riskier projects to get higher returns.”
  • “That’s a global issue with the wide-spread low interest rates, but the risk is greater in Denmark because of the exceptionally low rates.”
  • “To what extent this will lead to future losses and writedowns at banks, we can’t say now, and it won’t become apparent for some time yet.”

Jacob Graven, chief economist at Sydbank in Aabenraa, southwestern Denmark:

  • “It has obviously given banks higher costs as they have to place some of their money at negative rates. But this has come at a time when the Danish banks are in a healthier state thanks to the overall progress in the economy, so they have been able to handle it.”
  • “It has also caused some practical problems for the mortgage bond market, where a topic of discussion has been whether investors should actually be charged to borrow house owners’ money.”

Joachim Borg Kristensen, economist at Nykredit in Copenhagen:

  • “We foresee a problem in the housing market for people who have a lot of debt and may not be ready when interest rates go up.”
  • “There are individuals for whom higher rates will present a problem, but we don’t see a bubble in the market.”
  • “Overall the housing market will be healthy enough to cope when interest rates go up, unless the rise is very sudden and very sharp. There’s a risk that may happen, but it’s not our main scenario.”

For more, read this QuickTake: Less Than Zero

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