Man With Longest History of Negative Rates Says We Can Go Lower

No other central banker has more experience with negative rates than Lars Rohde.

As governor of Danmarks Nationalbank, Rohde oversees a monetary policy institution that has kept its rates below zero for the better part of almost four years. He even says that market estimates that Denmark’s policy rate might not go positive until 2019 may well be right.

Lars Rohde

Photographer: Freya Ingrid Morales/Bloomberg

For much of 2015, the Danish benchmark deposit rate was minus 0.75 percent, as part of a package of measures designed to defend the krone’s peg to the euro and to keep speculators at bay. But that level isn’t the “lower bound,” Rohde said on Wednesday.

The comments come as a growing number of increasingly desperate central bankers across the globe resort to negative interest rate policies as a way to revive lending and growth. To date, the European Central Bank, Switzerland, Sweden and the Bank of Japan have joined Denmark in resorting to the policy. Even Janet Yellen has said the Federal Reserve is “taking a look” at negative rates “in the event that we needed to add accommodation.”

Though their reasons may be different -- currency pegs versus inflation mandates -- central banker accounts of how negative rates work are attracting a lot of attention.

Rohde says it’s worth noting that negative rates work much in the same way as very low positive rates. He also says Denmark hasn’t seen “that many side effects” of the policy. The country’s biggest lender, Danske Bank A/S, even delivered record profits in 2015 and its shares have outperformed those of most of its biggest European competitors.

Unlike Switzerland, Denmark was able to beat back its speculators and Rohde has made some attempts at normalizing monetary policy. He raised the deposit rate in January, bringing it to minus 0.65 percent.

But Denmark is a small, open economy and its monetary policy is ultimately dictated by the ECB. If President Mario Draghi decides to deliver even more stimulus, Denmark has the means to follow, Rohde said.

“We have the feeling that we have all the necessary tools in our toolbox even
if the ECB could go lower than we’ve seen up until now,” he said.

Any financial stability issues that arise “should be dealt with not by monetary policy, because it’s dedicated to the euro peg, but by macro-prudential tools,” Rohde said.

The central bank’s efforts to date to save its currency regime have actually proved profitable. In addition to extreme rate cuts, Denmark was forced to ratchet up foreign reserves in 2015 until they accounted for about 40 percent of gross domestic product. It made about 2 billion kroner ($300 million) from transactions focused on defending the krone’s peg to the euro, it said on Wednesday. Its total profit in 2015 was 3.6 billion kroner.

The outcome shows speculators were gripped by “hysteria,” according to Jacob Graven, chief economist at Sydbank. “There was no reason to expect that the Danish central bank would lose the krone war because the bank’s war chest is unlimited.”

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