THE DANISH EXPERIENCE WITH NEGATIVE INTEREST RATES

DANMARKS NATIONALBANK

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THE DANISH EXPERIENCE WITH NEGATIVE INTEREST RATES

Niels Lynggård Hansen, Brookings, 6th June 2016

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Key lessons from experience with negative interest rates

Negative interest rates have been effective in maintaining the exchange rate peg

ZLB seems to be binding for households and small firms but large depositors are met with negative interest rates

Impact on bank profitability small and partial. Impact due to lower rates, not negative as such. Profitability supported by fees, increased trading activities and lower loan impairment charges.

No measurable substitution into cash at current level of interest rates

No indications of bubbles in asset prices so far

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Background on Danish monetary policy

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Danish exchange rate peg since 1982

Note: The DEM/DKK rate has been converted to a EUR/DKK rate before 1 January 1999. 1 euro = 1.95583 D-mark

Source: Danmarks Nationalbank

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Grafer: Grafer laves i Excel. Se vejledning her: http://natinfo/Videncenter/ DesignOgGrafik/ default.aspx

6.0

6.5

7.0

7.5

8.0

8.5

9.0

Market rate Central rate Fluctuation limits (+/- 2.25 per cent)

Kroner per euro

82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16


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Pressure reflected in monetary policy spread

Note: The interest rate spread is the spread between Danmarks Nationalbank’s rate of interest on certificates of deposits and the ECB’s rate. Until 14 October 2008, the ECB’s main refinancing rate is used. After this date the ECB’s deposit rate is used.

Source: Danmarks Nationalbank and ECB.

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-1

0

1

2

3

4

5

6

7

Monetary policy interest rate spread

Percentage points

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

Current account balance and net foreign assets

Source: Statistics Denmark and Danmarks Nationalbank

6

-60

-40

-20

0

20

40

60

80

-6

-4

-2

0

2

4

6

8

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Net assets (Right-hand scale) Balance of payments

Current account balance, per cent of GDP Net assets, per cent of GDP


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Interest rate spread and FX interventions

Note: Shaded quarters illustrate quarters where Danmarks Nationalbank intervened for more than DKK 20 bn. (net). Money market spread is the spread between 1 month OIS rates (i.e. EONIA- and CITA-swaps). Monetary policy spread is the spread between Danmark Nationalbank’s CD rate and the ECB’s deposit rate.

Source: Rio, Thomson Reuters Datastream, Danmarks Nationalbank and own calculations

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-1,0

-0,8

-0,6

-0,4

-0,2

0,0

0,2

0,4

Jan 14 Jul 14 Jan 15 Jul 15 Jan 16

Monetary policy spread Money market spread

Interest rate spread, per cent

Sale of FX

Purchase of FX


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Pass-through to lending and deposit rates

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Money market interest rate and banks’ average deposit and lending rates

Note: The money market interest rate is the monthly average of the 1-month CITA swap rate. * Adjusted for mortgage-like bank loans.

Source: Danmarks Nationalbank.

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-2

0

2

4

6

8

10

Lending rate, households Lending rate, corporate sector Deposit rate, households

Deposit rate, corporate sector Deposit rate, households* 1-month Cita-swap rate

Per cent

2008 2009 2010 2011 2012 2013 2014 2015 2016

Financial crisis Sovereign debt crisis ECB QE-programme


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Mortgate rates and government bond rates became negative

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-2

0

2

4

6

8

1-month Cita-swap rate 1-year Mortgage yields 30-year Mortgage yields

2-year Government bond yields 10-year Government bond yields

Per cent

2008 2009 2010 2011 2012 2013 2014 2015 2016


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Negative rates apply to large share of corporate deposits

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Source: Danmarks Nationalbank.

0

25

50

75

100

Non-financial corporations Insurance and pension funds Employees, retirees, etc

Negative interest rate Zero interest rate Positive interest rate

Share in per cent

Demand deposits,excluding

lending related deposits

Time deposits etc.

Lending relateddeposits


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Potential side effects

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Circulation of DKK 500 and 1,000 notes

42

44

46

48

50

52

Jan 12 Jan 13 Jan 14 Jan 15 Jan 16

Kr. billion


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Incentive to switch to cash depends on level and expected duration of negative rates

Source: Rio, own calculations.

14

Note: Derived from OIS rates. Observations are mid-month. ...

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

May-16 May-17 May-18 May-19 May-20

DKK EUR

Expected short rate

-1.8

-1.6

-1.4

-1.2

-1

-0.8

-0.6

-0.4

-0.2

0

Feb-15 Jul-15 May-16

DKK EUR

Incentive to switch to cash


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Systemic banks’ earnings broken down by main items

Note: Profit before tax also contains income from administrative margins, net fee income, other profit and loss account items and value adjustments. Source: Danish Financial Supervisory Authority and own calculations.

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-30

0

30

60

90

2010 2011 2012 2013 2014 2015

Impairments charges on loans and guarantees Net fee income

Net interest income (ex income from adm. margins) Profit before tax

Kroner billion


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No indications of a house price bubble

Source: Statisttics Denmark and own calculations.

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0

20

40

60

80

100

120

140

Actual house prices Estimated house prices from Danmarks Nationalbanks house price relation

Index 2010q1 = 100

74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14


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Legal and technical challenges have been addressed

Mortgage: Negative interest rates initially raised a number of technical and legal challenges

• IT systems: Handling a situation where borrowers receive and investors pay interest.

• Tax issues: Borrowers pay tax on interest received; investors can deduct any interest payable.

Existing loans based on variable rate bonds (typically based on CITA or CIBOR): Most mortgage banks apply an interest rate floor of 0 per cent

New loans: Borrowers benefit from negative interest rates, e.g. by direct disbursement or a reduction of the outstanding debt

Tax: The Danish parliament has furthermore adopted adjustments to a number of laws regarding the tax treatment of negative interest for pension returns and corporate tax

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Key lessons from experience with negative interest rates

Negative interest rates have been effective in maintaining the exchange rate peg

ZLB seems to be binding for households and small firms but large depositors are met with negative interest rates

Impact on bank profitability small and partial. Impact due to lower rates, not negative as such. Profitability supported by fees, increased trading activities and lower loan impairment charges.

No measurable substitution into cash at current level of interest rates

No indications of bubbles in asset prices so far

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Documents

THE DANISH EXPERIENCE WITH NEGATIVE INTEREST RATES