Denmark Cuts Interest Rates to Negative

Capital flight from the Eurozone has been giving Denmark’s central bank a headache.

So they experiment with negative rates—instead of the central bank (borrower) paying money to depositors (lenders), it’s now depositors (lenders) who pay the central bank (borrower) for safekeeping.

From Bloomberg, (bold emphasis mine)

Denmark’s central bank cut its main borrowing costs to record lows and brought the rate it offers on certificates of deposit below zero, as policy makers test uncharted territory to fight a capital influx.

The benchmark lending rate was cut to 0.2 percent from 0.45 percent, while the deposit rate was reduced to minus 0.2 percent from 0.05 percent, Copenhagen-based Nationalbanken said in a statement today. The move followed a quarter of a percentage point cut in the European Central Bank’s main rate to 0.75 percent. Nationalbanken doesn’t hold scheduled meetings and only adjusts rates to defend the krone’s peg to the euro.

“There’s no experience of how negative deposit rates will affect the financial markets and the krone,” Jacob Graven, chief economist at Sydbank A/S, said in a phone interview today before the decision was announced. “It’s a sign of the strong Danish economy. This is good. The opposite situation would be far worse, if the central bank would have to hike rates to defend the krone. We have a luxury problem.”

Denmark has stepped up its battle to prevent the krone from strengthening beyond its currency band as the nation’s haven status attracts investors. Danske Bank A/S (DANSKE), the country’s biggest lender, said last week it now has a risk scenario that envisages Denmark abandoning the peg should the cost of fighting currency appreciation grow too high. The bank doesn’t view this as a likely outcome, it said.

‘Absurd Scenario’

Negative rates were “until recently an absurd scenario,” said Christian H. Heinig, an economist at Realkredit Danmark A/S, the mortgage unit of Danske Bank. “Mortgage loan rates are already at record lows, and today’s rate announcement won’t have more than a limited effect here.”

The rate cut sent the krone to its weakest level since April 16 at 7.4427 against the euro. The currency was trading at 7.4396 as of 4:26 p.m. local time, compared with 7.4367 yesterday, according to prices available on Bloomberg.

Denmark has an agreement with the ECB to let the krone swing no more than 2.25 percent from central rate of 7.46038, though it maintains a tighter band in practice. Denmark’s foreign reserves climbed to a record high in June after the central bank tapped the currency market to weaken the krone. Reserves rose by 9.2 billion kroner last month to 511.6 billion kroner ($85 billion), the central bank said on July 3.

Of course there will an impact, even if they haven’t been visible to the economy now.

I’ve noted how Denmark’s 2 year bonds turned negative earlier here.

Such destabilizing capital flows are likely to spawn boom bust cycles.

And perhaps this may have began to manifest through Denmark’s equity markets.

Denmark’s major equity benchmark the Copenhagen 20 has been one of top world performers (18% year to date) and trails the Philippine Phisix by only a few percentage points.

No, this isn't about liquidity traps.

But this is the loony kindda o’ stuff you see only with the paper money system.