Negative Rates Into 2018 Seen as Price Denmark Will Pay for Peg

Denmark just raised its main interest rate for the first time in almost two years. But the bigger picture suggests the country will be stuck with negative rates until some time in 2018, which is roughly six years after it first dipped below zero.

That’s according to Danske Bank, Denmark’s biggest lender. This week’s 10 basis point increase in the deposit rate to minus 0.65 percent was probably a one-off move for now, according to Las Olsen, Danske’s chief economist in Copenhagen. “We don’t see another rate increase over the 12-month horizon,” he said in an interview.

That’s the reality for a central bank struggling to defend its euro peg as the European Central Bank blasts through currency markets with an historic stimulus program. And though Denmark is no longer fighting back speculators who early last year had sought to hoard AAA-rated krone assets, positive rates remain a very distant prospect.

“We don’t expect that we’ll enter a rate-increase cycle, where Denmark follows the ECB higher, until towards the end of 2017,” Olsen said. “When we first enter a rate increase cycle with the ECB, it could go relatively quickly so we might well have positive rates in Denmark some time in 2018.”

For now, the country’s commercial banks will take what they can get. Denmark’s benchmark rate has, on and off, been negative since mid-2012. That’s eaten into bank net interest income and made cost-cutting key to protecting profits. Thursday’s rate increase led to sudden share-price jumps at the country’s biggest lenders.

In separate notes published Friday, Nordea Bank and Jyske Bank both said they expect the central bank to raise its deposit rate at least once in 2016.

But at the Confederation of Danish Enterprise, the upshot is clear.

Thursday’s cut is “not a major change in the condition for businesses,” Steen Bocian, the group’s chief economist, said by phone. “We’re still looking at a very negative rate in Denmark.”

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