Photographer: Freya Ingrid Morales/Bloomberg

Depression-Era Danish Prices Coincide With Record Negative Rates

  • Danish inflation flatlines after years of below-zero rates
  • Consumer price developments match those of 1930s, Danske says

Denmark boasts the world’s longest history of negative interest rates. But far from stimulating price growth, the monetary climate has coincided with the longest period of low inflation since the Great Depression, according to Danske Bank A/S.

The central bank in Copenhagen, which defends the krone’s peg to the euro, has mostly kept its benchmark deposit rate below zero since mid-2012. Since then, inflation has petered out, with a report on Monday showing Denmark’s consumer prices stagnated in September from a year earlier. Prices for services reached their slowest pace in more than half a century.

The negative rate environment has brought with it a number of surprises. Helge Pedersen, chief economist at Nordea Bank AB in Copenhagen, says it’s also worrying that investment has failed to pick up. “It really tells us that monetary policy hasn’t been that successful,” he said by phone.

For Denmark, 2016 will be the fourth year in a row with consumer price gains below 1 percent, something not seen since the beginning of the 1930s, said Las Olsen, an economist at Danske. The Danish economy will only expand 0.6 percent this year, after growing 1 percent in 2015, Handelsbanken estimates. Growth will be even slower next year, at 0.5 percent, it said.

After a recession in the second half of last year, “the recovery continues to look fragile,” Jes Asmussen, chief economist at Handelsbanken in Copenhagen, said in a report on Tuesday. Slower growth abroad, a shrinking tailwind for household spending and lackluster investment all mean that growth isn’t likely to pick up “over the coming years,” he said.

Investors hedging against a sudden price rise, including Denmark’s biggest pension fund ATP, have lost money doing so. If you bought Denmark’s 2023 inflation linked bond in the first half of 2014, you would have lost 10 percent relative to investing in the country’s benchmark 10-year nominal bond.

The phenomenon is global. In Japan, where 10-year bond yields are negative, Governor Haruhiko Kuroda is signaling policy makers may not achieve their 2 percent inflation target until 2018, despite the prospect of faster economic growth. In the euro zone, European Central Bank President Mario Draghi has said inflation will reach the target by early 2019, at the latest.

In Sweden, which has had negative rates since February last year, headline inflation slowed to 0.9 percent last month, the country’s statistics office said on Tuesday. That’s less than analysts had expected and drove the krona down as much as 0.8 percent against the euro.

Much of the decline in inflation has come from lower energy prices since 2014. But an almost 90 percent rebound in Brent crude since January has so far had a limited effect on consumer prices. The only way to rekindle inflation is to get consumers to expect higher prices in the future and Olsen at Danske says the ECB will have little choice other than to delve even further into its stimulus kit.

For now, Denmark’s low inflation has helped boost real wages. But the general tendency toward continued low prices will ultimately make it difficult for workers to insist on big pay rises when they negotiate new contracts, according to Olsen.

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