The Great Negative Rates Experiment

The Swedes, Danes, and Swiss venture to the subzero zone.

The headquarters of Danske Bank, left, stands opposite the Danish central bank in Copenhagen.

Photographer: Linus Hook/Bloomberg

When the Federal Open Market Committee decided in September to leave its main policy rate where it’s been for seven years—close to zero—it included an extraordinary detail. According to the “dot plot,” the display of unattributed individual policy recommendations, one committee member believed that the rate should be below zero through 2016. That is, rates should go to a place the U.S. has never had them before.

In theory, it shouldn’t be possible for a central bank to keep short-term interest rates below zero. Banks would have to pay the Federal Reserve to hold reserves. Consumers would have to pay banks to hold deposits. Banks and people can hold physical cash, which charges no interest. This is why economists see zero as the lowest possible rate. It’s just theory, though; real-world experience shows the actual lower bound is somewhere below zero.


Denmark’s key bank rate dipped below zero in 2012 and is at minus 0.75 percent. Economists recently surveyed by Bloomberg see negative rates in that country continuing at least into 2017. Switzerland has kept the rate at minus 0.75 percent since early this year, and Sweden’s is minus 0.35 percent. These countries have a different monetary goal from that of the Fed. Denmark and Switzerland have been working to remove incentives for foreigners to deposit money in their banks. Massive foreign inflows would drive their currencies to appreciate so much they would become seriously misaligned with the euro, the currency of their main trading partners. Sweden has been attempting to create inflation.

The strategy has had some success. Denmark has been able to hold on to its peg to the euro. Switzerland dropped its euro peg, and after an initial runup, the Swiss franc has traded within a predictable band. Sweden’s inflation has seesawed.

In all three countries, banks were reluctant to pass negative rates on to their domestic customers. In Denmark deposit rates have fallen, and some banks have raised fees for their services, but “real rates for real people were actually never negative,” says Jesper Rangvid, a professor of finance at the Copenhagen Business School. The same is true for Sweden, according to a paper by the Riksbank, the central bank. In Switzerland, one bank, the Alternative Bank Schweiz, will impose an interest charge on retail deposits starting in January.

There’s no evidence of a flight to cash in any of the three countries. According to central bank data, Danish households have added 28 billion kroner ($4.3 billion) to bank deposits since rates shrank to their record low on Feb. 5. That’s because a sack of bills has to be stashed somewhere safe, and protection costs money. According to Rangvid, rates would have to drop as low as minus 10 percent before people start “building their own vaults.” In its paper, Sweden’s Riksbank pointed out the same possibility but declined to say how far below zero rates would have to go to trigger depositors’ exit from the banks in the largely cash-free country.

In the U.S., Narayana Kocherlakota, the dovish president of the Minneapolis Fed, has expressed support for negative rates as an option. (He’s likely the anonymous negative rate dot-plot guy.) So has John Williams of the San Francisco Fed. William Dudley of the New York Fed, a moderate, said during an Oct. 15 event that the FOMC had considered negative rates during the depths of the financial crisis. Experience in Europe, he said, showed that the unintended consequences of negative rates were “less than what people had feared.”

Since they dropped rates below zero, there has been no clear, consistent economic trend among the three countries. In Denmark asset prices have risen as Danes sought higher returns. Spurred by speculation, the local stock market has recorded more than twice the gains of the Stoxx Europe 600. Danske Bank, Denmark’s biggest lender, says Copenhagen is becoming Scandinavia’s riskiest property market, because of a surge in prices. Danish businesses have increased their investments only 6 percent; private consumption has risen 5 percent. According to Torsten Slok, Deutsche Bank’s chief international economist in New York and a Dane, negative rates “raise risks in the short term and do little more to help the economy than what can be achieved with bond purchases.”

In Switzerland there’s little sign of overheated property or stocks, or new consumption. Recently, Thomas Jordan, head of the Swiss National Bank, saw potential side effects but called negative rates an “important and unavoidable monetary instrument to weaken the attractiveness of the [Swiss] franc.”

All three countries have dipped below zero without massive withdrawals. That’s a valuable lesson for economists. But in Sweden, it’s too early to tell whether negative rates have created inflation. And in Denmark and Switzerland, this tool has succeeded only in its precise and limited purpose: to manage exchange rates with the euro. That finding will be of limited value to the Fed.

—With Peter Levring, Nick Rigillo, and Catherine Bosley

The bottom line: Although negative rates were thought to be impossible, they’ve been deployed in Europe to keep currencies in check.

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