(March 19): Denmark’s central bank will switch from operating one negative interest rate to three by the end of this week, joining several other peers that have overhauled frameworks in a bid to fine-tune their policy levers.
The Copenhagen-based Nationalbank, whose subzero monetary stance since 2012 is the longest-lasting such experiment, is bringing into effect changes to its regime that it announced to investors last Thursday. Its overnight deposit rate and its key deposit rate will now both be at -0.5%, while its lending rate will be at -0.35%.
The measures are designed to help fulfil the central bank’s mandate of protecting the krone’s peg to the euro, responding to fluctuations in money-market rates that flowed from the wide spread in its rates. The revamp is just one of many tweaks by counterparts in recent years aimed at enhancing control of monetary policy using multiple levers.
In Denmark, the spread between the central bank’s key lending and deposits rates has been gaping for more than half a decade, leading to market vacillations that hindered the defense of the peg, according to Daniel Brodsgaard, a fixed income analyst at Danske Bank A/S. The changes are a shift in approach that more broadly applies subzero policy.
“The central bank has for some unknown reason been against having a negative repo rate,” Brodsgaard said. “The wide corridor issue is not a negative-rate phenomenon, since we can see now it can be easily solved by just making the corridor tighter even when rates are negative.”
Trouble associated with the too-wide spread hit Denmark last March, when market turmoil struck as the potential scope of the pandemic sank in, and the central bank was forced to intervene to support the currency peg, Governor Lars Rohde said. Then followed a drop in liquidity and big swings in the government’s account, with the effect that it became unclear to the market and “also us” which rates were key for the money market, he said.
“This is the uncertainty we wanted to reduce. Thereby we also get a clearer impact on the money market and thus indirectly also on the krone market,” Rohde said in an interview this week. He expressed confidence that the rate changes will have the desired effect.
“I think those dealing with liquidity will say ‘OK, now the expected fluctuations in money-market interest rates may be small and almost negligible,”’ he said on Wednesday.
In the years since Denmark first went negative in 2012, mortgage rates have touched or fallen below zero. Banks now charge for deposits, after starting with businesses and in recent years moving on to retail customers. Most recently, some said that clients would incur costs for holding as little as US$16,000.
The multiple levers of monetary policy applied in Denmark show a level of complexity that is usual for central banks trying to stimulate economies in an era of open markets, weak inflation and ultra-low real rates. Here’s a quick look at some other recent framework changes by regional counterparts.
The Hungarian central bank has pro-actively tweaked its money-market regime over several years and is the only monetary authority in the European Union to have raised interest rates since the start of the pandemic.
In the most recent tweak of its regime last April, it started 1-week deposit tenders, which have now become the most influential tool to drain excess liquidity in the economy. The 0.75% rate currently offered is higher than the 0.6% base rate set monthly on required reserves.
Denmark’s subzero policy may be the longest-lasting, but Switzerland’s has the deepest, with an interest rate of -0.75%. That so-called Swiss National Bank policy rate was instituted in June 2019 to replace a target range for three-month Libor, which had been set with an identical midpoint. The phasing out of Libor rates had motivated the central bank to create a new benchmark.
Since 2013, Turkey’s central bank has repeatedly resorted to a framework of multiple interest rates to be able to tighten monetary policy without receiving the ire of politicians led by President Recep Tayyip Erdogan, who has an unorthodox view on the relationship between the cost of borrowing and inflation.
Current governor Naci Agbal simplified that framework after taking over the institution in November and has since raised the policy rate of one-week repo by 875 basis points to 19%, offering investors some of the highest real rates among peers.