DANMARKS NATIONALBANK

Transcription

1 DANMARKS NATIONALBANK THE DANISH EXPERIENCE WITH NEGATIVE INTEREST RATES Niels Lynggård Hansen, Brookings, 6th June 216

2 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 2

3 Background on Danish monetary policy 3

4 Danish exchange rate peg since 1982 Kroner per euro Market rate Central rate Fluctuation limits (+/ per cent) Note: The DEM/DKK rate has been converted to a EUR/DKK rate before 1 January euro = D-mark Source: Danmarks Nationalbank 4

5 Pressure reflected in monetary policy spread Percentage points Monetary policy interest rate 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 28, the ECB s main refinancing rate is used. After this date the ECB s deposit rate is used. Source: Danmarks Nationalbank and ECB. 5

6 Current account balance and net foreign assets Current account balance, per cent of GDP 8 Net assets, per cent of GDP Net assets (Right-hand scale) Balance of payments Source: Statistics Denmark and Danmarks Nationalbank 6

7 Interest rate spread and FX interventions Interest rate spread, per cent,4,2 Sale of FX, -,2 -,4 -,6 -,8 Purchase of FX -1, Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Monetary policy spread Money market spread Note: Shaded quarters illustrate quarters where Danmarks Nationalbank intervened for more than DKK 2 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 7

8 Pass-through to lending and deposit rates 8

9 Money market interest rate and banks average deposit and lending rates Per cent 1 Financial crisis Sovereign debt crisis ECB QE-programme Lending rate, households Lending rate, corporate sector Deposit rate, households Deposit rate, corporate sector Deposit rate, households* 1-month Cita-swap rate 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. 9

10 Mortgate rates and government bond rates became negative Per cent month Cita-swap rate 1-year Mortgage yields 3-year Mortgage yields 2-year Government bond yields 1-year Government bond yields 1

11 Negative rates apply to large share of corporate deposits Share in per cent 1 Time deposits etc. 75 Lending related deposits 5 25 Demand deposits, excluding lending related deposits Non-financial corporations Insurance and pension funds Employees, retirees, etc Negative interest rate Zero interest rate Positive interest rate Source: Danmarks Nationalbank. 11

12 Potential side effects 12

13 Circulation of DKK 5 and 1, notes Kr. billion Jan 12 Jan 13 Jan 14 Jan 15 Jan 16

14 Incentive to switch to cash depends on level and expected duration of negative rates Expected short rate Incentive to switch to cash May-16 May-17 May-18 May-19 May-2 DKK EUR Feb-15 Jul-15 May-16 DKK EUR Note: Derived from OIS rates. Observations are mid-month. Source: Rio, own calculations

15 Systemic banks earnings broken down by main items Kroner billion Impairments charges on loans and guarantees Net fee income Net interest income (ex income from adm. margins) Profit before tax 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. 15

16 No indications of a house price bubble Index 21q1 = Actual house prices Estimated house prices from Danmarks Nationalbanks house price relation Source: Statisttics Denmark and own calculations. 16

17 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 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 17

18 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 18