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UPDATE 3-Denmark sets a negative rate for first time
July 5, 2012 / 3:37 PM / 5 years ago

UPDATE 3-Denmark sets a negative rate for first time

* Central bank cuts main policy rate by 25 bps to 0.20 pct

* Cuts CD rate by 25 bps to negative 0.20 pct

* Keeps current account rate unchanged at 0.0 pct

* Lifts current account limits (Adds c.bank governor quotes, details; updates crown rate)

By John Acher and Ole Mikkelsen

COPENHAGEN, July 5 (Reuters) - Denmark’s central bank cut interest rates by a quarter point on Thursday, mirroring the European Central Bank’s action earlier in the day, putting one of its secondary rates below zero for the first time in history.

Yields on some short-end Danish government bonds had already turned negative earlier, as investors fearful of turmoil in the euro zone have piled into non-euro assets, including Danish bonds, and are were willing to pay to shelter their money.

The Nationalbank cut its lending rate to 0.20 percent from 0.45 percent and lowered its certificates of deposit (CD) rate to negative 0.20 percent from 0.05 percent to match the ECB’s move and to curb strength in the Danish currency.

“When the ECB moves downwards, we are moving in parallel,” central bank Governor Nils Bernstein told Reuters.

“Our main concern is the pegging of the crown to the euro, and therefore we want to make sure that the effect of the interest rate is felt,” Bernstein said.

EU member, but euro outsider, Denmark conducts a fixed exchange-rate monetary policy to keep the crown steady within a narrow band to the euro, and the central bank changes interest rates for the sole purpose of carrying out that mandate.

The negative CD rate means that banks must pay the Danish central bank for the privilege of depositing money with it, which is a reflection of the high uncertainty in financial markets as Europe’s debt crisis has deepened.

Bernstein said that the Nationalbank had no intention of burdening banks excessively, but that the cost to banks of the negative CD rate were estimated to be about 200 million Danish crowns ($33.28 million) on an annual basis.

He said that estimate took into consideration that banks were likely to shift some money out of CDs and into the current account at the central bank after the Nationalbank on Thursday lifted the limits on banks’ current account deposits.

“In isolation, it is a burden on the banking system,” Bernstein said. “Their deposits for the time being are bigger than what they have borrowed from the central bank, so overall this is an increased burden.”

He said he expected the effect of a negative interest rate on the economy overall to be marginal. “If there is an effect, it might be slightly negative but it’s difficult to say...We are burdening the banking system in a situation where they have increased (loan) losses.”

The Danish central bank has been fighting to curb the strength of the crown currency which has been fuelled by crisis-wary investors fleeing the euro zone seeking shelter in non-euro assets, including Danish government and mortgage bonds.

The crown softened to its weakest levels in seven-and-half months, and traded at 7. 4 415 to the euro at 1644 GMT f r om around 7.4365 before the bank’s announcement.

The battle to stem the crown’s strength prompted two independent Danish rate cuts in May, which set the stage for the bank’s historic cut in the CD rate into negative territory.

“The lowest interest rate levels in the history of the Nationalbank’s existence since 1818 can be attributed to the ... economic crisis in the euro zone,” Danmark chief economist Christian Hilligsoe Heinig said in a note to clients.

NOTHING FUNDAMENTALLY NEW

But Bernstein told Reuters that there was nothing fundamentally new in a negative interest rate.

“We have always used intervention and changes in our interest rate, and that is what we have done today.” Bernstein said. “The new thing is that we have moved into negative territory, but fundamentally it is the same two instruments.”

Danske Bank senior strategist Kasper Kirkegaard said that the Nationalbank had demonstrated that negative rates are not a problem for it, and it could cut even deeper.

“And if the demand for the Danish crown and Danish government bonds continues, the interest rate can become even more negative,” Kirkegaard said. “It is far from certain that we have seen the last rate reduction this year.”

But Nordea senior analyst Jan Storup Nielsen noted that the ECB had not signalled further rate cuts on Thursday. “That also means that we today are likely to have seen the last rate cut from the Nationalbank for now,” Nielsen said.

CURRENT ACCOUNT LIMITS UP

The Nationalbank, whose policy aims to keep the crown steady within a narrow band to the euro, left its current account rate unchanged at 0.0 percent and raised the limits on how much money banks can hold in the current account at the central bank.

It tripled the total limit on the current account to 69.7 billion Danish crowns ($11.60 billion) from 23.15 billion.

Banks hold 186.3 billion crowns in CDs and 21.0 billion crowns in the current account at the central bank, so the increased limits on their current account deposits will enable them to shift some, but not all, of their money out of CDs with a negative rate of interest.

“With this action, the Nationalbank is trying to reduce some of the pain which negative current account rates would unavoidably mean for Danish banks and mortgage institutions,” Nordea’s Nielsen said.

The Nationalbank had said at the end of May, when it last lowered borrowing costs, that rates could turn negative and that it had the tools to cope with that if necessary.

It said then that a scenario with a negative CD rate would imply a current account rate higher than the rate of interest on CDs and an upward revision of current account limits. ($1 = 6.0098 Danish crowns) (Additional reporting by Mette Fraende; Editing by Michael Roddy)

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