Denmark’s Decade-Long Experiment With Negative Rates Seen Ending Soon

Danish banks expect a decade-long experiment with negative interest rates to soon come to an end, after the country’s central bank raised its key interest rate, sending it closer towards positive rate territory.

In 2012, Denmark became the first country in the world to impose negative rates, a trend since adopted by other countries to combat both weak inflation rates and changing savings patterns by consumers and businesses.

But as central banks, including Denmark’s, now raise rates to curb soaring inflation, lenders are set to break with past years’ negative interest rate trend.

“This is the starting point for us to exit the era of negative interest rates very soon,” said economist at Arbejdernes Landsbank, Lisette Rosenbeck Christensen.

Denmark’s central bank raised its key interest rate by 0.5 percentage points to minus 0.1% on Thursday, following a rate hike earlier in the day by the European Central Bank (ECB) aimed at stifling inflation.

The primary mandate of the Danish central bank is to keep the crown currency stable within a narrow band to the euro. It does that via currency interventions and adjusting its rate in lockstep with the ECB.

“The Danish economy is now very close to leave the period of negative interest rates behind,” said Soren Kristensen, chief economist at Sydbank.

On Friday, Nykredit, Denmark’s second-largest lender, became the first to entirely remove negative interest rates on private clients’ deposits.

“With the latest adjustment from Denmark’s central bank and another adjustment expected in September, we at Nykredit have decided that negative deposit interest rates for our private customers must come to an end,” Nykredit’s banking director Henrik Rasmussen said in a statement.

Danish lenders Danske Bank, Jyske Bank and Nordea on Thursday also raised rates on large deposits as a result of the central bank hike, but kept them below zero.

Most Danish lenders introduced negative interest rates on clients’ large deposits in 2019 to cushion against costs incurred for depositing funds at the central bank at a negative rate.

Lower interest rates generally spur investments by making it cheaper to loan money, while higher rates can put a damper on economic activity.

Banks will benefit from rate hikes, as loans become pricier, but not if the higher rates lead to recession and fluctuating markets, Danske Bank’s Chief Executive Carsten Egeriis said on Friday.