The impact of negative interest-rates on the economy of Denmark

Whilst so much of the media and indeed the world were focusing on the travails of my old employer Deutsche Bank yesterday something else significant sneaked under many radars. This was the International Monetary Fund lecturing Switzerland on the subject of negative interest-rates as you can see below.

Calibrating the negative interest rate differential so as to discourage persistent inflows that can cause prolonged deflation and weaken activity is appropriate.

A rather flowery way of suggesting an interest-rate cut from the present -0.75% which is reinforced here.

Some widening of the current effective interest rate differential—either by lowering the exemption threshold or the marginal policy rate—could therefore be considered to reduce the frequency of small-scale interventions.

So the IMF would prefer that Switzerland cut its interest-rates again further into negative territory rather than intervene in foreign exchange markets. That is intriguing on two fronts and the first is the fact that it is tempting it to test where the lower bound is which I shall define as the point at which bank depositors switch to cash. The second is that it is setting interest-rate for foreigners and foreign investors rather than the domestic economy. Indeed for the domestic economy there is potentially trouble ahead according to the IMF.

Sustained low interest-rates could raise financial stability risks……..Elevated household debt and banks’ concentrated exposure to mortgages could be key amplifiers in the event of macroeconomic shocks .

Reality for Denmark

This made me think of the country which has had negative interest-rates for the longest as Denmark plunged into that icy cold world in early July 2012 when it cut to -0.2%. They have been there since apart from a brief foray to the not so giddy heights of 0.05% in late spring and summer 2014. Also if the IMF view extends to other countries which set their interest-rate more for the foreign exchanges than domestic demand there might be another reverse ferret on its way.

Effective from 8 January 2016, Danmarks Nationalbank’s interest rate on certificates of deposit is increased by 0.10 percentage point to -0.65 per cent.

As it was nobody was expecting an end to negative interest-rates anytime soon according to the Nationalbanken or DNB.

The implied overnight interest rate does not reach 0 per cent until in four years

The ordinary experience

This is for borrowers as follows according to the DNB.

Viewed over a longer period, there has generally been close to full pass-through from the rate of interest on certificates of deposit to the banks’ lending rates.

We note they took their time and wonder about how we define close but okay. However the experience for the ordinary depositor remains different.

The banks have been hesitant to pass on the negative rate of interest at Danmarks Nationalbank to small enterprises and especially to households. The latter have been completely exempt from negative deposit rates.

I have wondered along the line of the lyrics below about this.

How long has this been going on?
How long has this been going on?

As far as we can tell banks will continue to resist passing on negative deposit rates to the ordinary investor. However businesses are not exempt as some 30% of deposits are and I have pointed out the dangers to long-term business models from them.

Negative deposit rates are in widespread use for insurance and pension companies, for which the alternatives to bank deposits are placement on money market-like terms, e.g. in short-term securities, likewise at negative rates of interest.

Actually it would now appear that the pension industry likes very few potential futures.

Some pension companies have reported to the Danish Financial Supervisory Authority that substantial interest rate hikes would be the worst scenario imaginable for them.

Mortgage Rates

The Danish Mortgage Bank data is delayed but in week 22 of 2016 then the average short-term rate was -0.23% in Danish Kroner and -0.13% in Euros. The long-term rate was 2.65%.

Any signs of trouble?

If we were to find any they would be found in asset markets of which the likeliest is house prices. On that I noticed this in the DNB Monetary Review.

Since March, the yield on mortgage bonds has fallen more sharply than the yield on government bonds,

Rather awkwardly the rally was driven by foreign investors noting that the ECB (European Central Bank ) is buying such bonds ( covered bonds) in the Euro area making the Danish variety look more attractive. So what about the housing market.

Let me hand you over to a report earlier this month from the DNB which opens with an official denial of what Taylor Swift would define as “Trouble,Trouble,Trouble”.

Although house prices have risen considerably over the last 3-4 years, there are no indications that the Danish market overall is experiencing a speculative house price bubble.

Ah so over the period of negative interest-rates! In case you are wondering about the overall state of play here it is.

But today’s annual increases of 4-5 per cent do not indicate a bubble.

However it has been ” Wonderful! Wonderful! Copenhagen” for those who have invested in property there.

However, price increases in Copenhagen have been so persistent and strong that the development could be consistent with a bubble according to the test, just as in the mid-2000s……. So Danmarks Nationalbank finds that there is reason to monitor developments in Copenhagen closely.

So we learn that monitoring closely is one step up from being “vigilant” in central banker speak. Also those who want to buy in Copenhagen must feel excluded in many cases.

The Real Economy

This has been troubled during this period but has so far in 2016 seen a better phase recording quarterly GDP growth of 0.7% and then 0.5%. But considering the monetary stimulus the forecasts are hardly stellar.

Danmarks Nationalbank expects the gross domestic product (GDP) to grow by 0.9 per cent this year, rising to 1.5 and 1.8 per cent, respectively, in the next two years.

However according to the Governor there may well be trouble ahead.

“We expect the economy to reach its normal capacity level as early as 2018. Conducting expansionary fiscal policy well beyond that point is risky, especially if interest rates continue to be very low. There is a risk of overheating and economic imbalances, which it may be necessary to take measures to prevent,” says Lars Rohde.

He also thinks that fiscal policy needs tightening which means that the current establishment memo seems to have forgotten to be sent to Denmark.


There is much to consider here. Firstly I think that advocates of monetary stimulus have to conclude that the effect on economic growth has disappointed. Denmark has simply not had much and if you factor in the lower oil price it has not done well at all. As to specific news we have reports in the Copenhagen Post of businesses bring production home but also the problems of world shipping are affecting Maersk on the other side of the coin.

Meanwhile we are seeing another move higher in house prices which has even the central bank getting out its slide rule for bubbles! I also note it seems to be hinting/asking for higher taxes on property. On that front well as we see yet another record low for the 2 year bond yield of Germany as it get safe haven flows because of the problems of Deutsche Bank  we may yet see more downwards pressure on interest-rates and yields. Oh and as Elton John put it “Please don’t shoot the piano player” about the last sentence.

Something rather familiar to UK and US readers is found in Denmark which is that employment has done better than GDP growth which raises a familiar concern and theme.

Productivity growth in the Danish economy has been weak in the wake of the financial crisis. This is especially the case from the 2nd half of 2015 and onwards when the decoupling of output and the labour market situation calls into question future productivity growth and the actual sustainability of the growth in employment seen during the last year or so.

Share Radio

I was interviewed on the evening show by Simon Rose yesterday.



17 thoughts on “The impact of negative interest-rates on the economy of Denmark

  1. Before we sail Viking-like into this topic there’s a whole hurdy gurdy smorresbord of bacon and pastry puns to get out of the way first. So that’s done that then…

    Shaun can you expand on why you think the pension industry players are so fearful of a raise in interest rates? Is it, do you think, because they are stuffed to the gills with bonds and other instruments which might be adversely affected? I do not know anyone here in the UK industry who doesn’t want some yield to come back in the long term, whatever the short term issues it might cause. A whole industry is being slowly strangled. We simply cannot go on as we are, and that applies to DC as well as to DB.

    Anyway, I think Denmark is living in something of a nether world, dark in the shadow of its neighbour’s woes, and puts me in mind of the 1968 hit Hurdy Gurdy Man;

    Histories of ages past
    Unenlightened shadows cast
    Down through all eternity
    The crying of humanity.
    ‘Tis then when the Hurdy Gurdy Man
    Comes singing songs of love,
    Then when the Hurdy Gurdy Man
    Came chasing rates back above.

    I made up the last line, but I reckon Donovan’s reverie is indicative of the state of mind of more than just the Danish Central bankers.


    • Hi Andy

      My father was a Donovan fan so I do know the song. As to your question then the DNB was clearly implying that some pension funds have done a fair bit of hedging around these levels.

      Found it again!

      “All investors with portfolios of long-term bonds
      will suffer capital losses if long-term interest
      rates rise strongly. Most of the capital losses in
      Denmark will hit the pension sector, which has
      some insurance against higher interest rates via
      pension commitments and financial instruments.
      All the same, there are pension companies which
      have reported to the Danish Financial Supervisory
      Authority that substantial interest rate hikes
      would be the worst-case scenario for them.”

  2. Great blog as always, Shaun.
    I listened to your interview on Share Radio. Concerning the issue of where the two percent target rate for inflation targeting central banks comes from, there is no doubt that it was a Canadian invention. The first inflation targeting central bank was the Reserve Bank of New Zealand, but when the New Zealand Minister of Finance Roger Douglas first proposed an IT regime on April Fool’s Day, 1988, he proposed a target inflation range of zero to two percent, i.e. two percent was the upper bound, not the target rate. The initial Policy Targets Agreement of 2 March 1990 also specified the same range rather and no point target rate, and ever since the RBNZ has strived to keep inflation “within a specific target band” rather than to hit a specific target rate. By contrast, the first inflation control agreement signed between the Canadian Finance Minister Michael Wilson and Bank of Canada Governor John Crow in February 1991 specified a series of target rates: 3% by the end of 1992, 2½% by the middle of 1994 and 2% by the end of 1995, with lower target rates to follow. The new Liberal Finance Minister Paul Martin didn’t care for further reductions in the target rate and kept any reference to a lower target rate out of the initial renewal agreement in 1993, at which time it was announced that Gordon Thiessen would be the new Bank of Canada governor.
    So two men, Michael Wilson and John Crow, should be credited with the two percent target rate. Michael Wilson is Canadian born, but John Crow is a Londoner, like yourself, so I am surprised you would be giving credit to a New Zealander for the two percent target rate. It is fair to say that Douglas brought the two percent parameter into the discourse of IT central banks, so it was there from the beginning.

    • Hi Andrew and thanks

      The debate has gone on for a while and I am happy to be corrected. The issue of it being a Kiwi rather than Canadian development has come from the US of which the link below is an example.

      I have seen the same reported in the Wall Street Journal, but perhaps they all follow the philosophy of South Park which blames Canada for most things and would be unlikely to give it credit.

      • Hi guys,
        As I remember it when Roger Douglas (or was it Don Brash?) first suggested inflation “targeting” they really didn’t know how the policy should be framed. zero to 1% was the first stab; zero to 2% was presented to parliament. For the last 14 or so years it’s been 1 to 3%. The target range widened as time progressed.

        However, the NZ annual inflation rate has been below 1% since January last year, right now it’s 0.4% – so perhaps the NZ bank rate will be reduced again and make Auckland the most expensive place to live in the Universe. Or should TPTB decide zero to 1% was “right” all along!

        Maybe Goodhart has something to say about this.

        • Eric, it is fair to credit both Douglas and Brash with introducing inflation targeting to the world. As I wrote to Shaun, Douglas announced the intention of targeting inflation in April 1988. Brash was the RBNZ governor when the initial Policy Targets Agreement was signed in 1990. By that time Douglas was no longer Finance Minister. Governor Brash signed the agreement with the new Finance Minister, David Caygill. Maybe you are right and a 0% to 1% range was discussed early on but Douglas in his April 1988 TV interview and the 1990 PTA both referenced a 0% to 2% target range. As you said, it was later expanded to 0% to 3%, but in the most recent 2012 PTA it was narrowed to 1% to 3% “with a focus on keeping future average inflation near the 2 per cent target midpoint,” So it seems that the RBNZ has now adopted the same target range as the Bank of Canada and, later, the Bank of England. It also seems to have more or less gravitated towards a two per cent target rate, even if it doesn’t officially use that term.

  3. Listening to your interview on, “Share Radio,” helped one thing, at least, become crystal clear in my mind: THERE IS NO CURRENCY WAR. That can be deduced,, with absolute certainty, from GBP’s post-referendum fall, and the reaction to it, both home and abroad.

    What is happening is that a few CB’s are testing the water, as to the de facto lower bound, and others then follow. It may have the look of a currency war, and it would be simple to make that mistake, but cutting interest rates after >10% drop in value???

  4. As for today’s subject, I’m already withdrawing £600 a day in cash, as I see the risk (and lending ALWAYS carries some, that is the illogicality of negative rates) of lending to banks rising with the plight of Deutsche Bank.
    My accounts will be emptied before the rate reaches zero.

    • you will still get caught

      all that old money will be made illegal and you will have to trade it for the “new” notes issued

      here in the UK any gold you buy is recorded – you will be forced to exchange it for a government IOU , under duress of course

      silver you pay VAT on but then again …..


      PS: in time we’ll be in the cart going where?

    • Maybe those new plastic £5 notes will have longevity? Pity there isn’t a zero after the 5, since the low denomination will be tiresome.

  5. There is one huge problem with ultra-low interest rates: those who can afford to pay off their debt before rates rise, those who cannot afford to become an ever-larger % of lenders’ balance sheets.

  6. Shaun, enjoyed the radio show, keep working on the exposure and stay honest, that way you will stand out from the establishment wonks.

  7. Hi Shaun, great blog as always.
    RE: “to test where the lower bound is which I shall define as the point at which bank depositors switch to cash.”
    I work in the IT centre for a German Savings Bank on their reporting systems (to the BuBa and EZB). A couple of weeks ago a program “bug” was discovered – “all” interest sums were being reported as a positive number.
    After correcting and testing this error I was stunned to see several score accounts which are already subject to negative interest rates.
    You may be surprised and interested to learn, that the highest of these was a “meagre” -0.2% but on a balance over €15 million!

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