DANMARKS NATIONALBANK EXPERIENCE OF NEGATIVE INTEREST RATES IN DENMARK. Niels Lynggård Hansen, Director, Danmarks Nationalbank

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1 DANMARKS NATIONALBANK EXPERIENCE OF NEGATIVE INTEREST RATES IN DENMARK Niels Lynggård Hansen, Director, Danmarks Nationalbank

2 2 GDP growth Per cent, year-on-year Real GDP growth Note: are Danmarks Nationalbank s projections from March Source: Statistics Denmark and Danmarks Nationalbank.

3 3 Basis for pick-up in demand Index, 2000 = Per cent of GDP deterioration of competitiveness consolidation and improvement of competitiveness Net lending in private sector (right hand axis) Relative unit labour costs in manufacturing Source: Danmarks Nationalbank and Statistics Denmark.

4 Exchange rate, oil prices and interest rates stimulate Danish GDP growth 4 Percentage points 1,4 1,2 1,0 0,8 0,6 0,4 0,2 0, Exchange rate Oil price Interest rates Note: Estimated effects of lower oil prices, depreciation of the effective krone rate and lower interest rates since August 20. Source: Own calculations.

5 5 The Danish exchange rate peg 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: Bloomberg.

6 6 Challenges: episodes of currency pressure Per cent of GDP Last change of central parity Per cent, year-on-year Currency outflow Currency inflow Net foreign assets Real GDP growth (right-hand axis) Note: Source: Statistics Denmark and Danmarks Nationalbank.

7 7 FX reserves, percentage of GDP Per cent of GDP 40 December: kr. billion January: kr. billion February: kr. billion March: kr. billion April: kr. billion Note: GDP in 1st quarter 2015 is based on Danmarks Nationalbank s projections. Source: Statistics Denmark and Danmarks Nationalbank.

8 8 Monetary policy rates Per cent Jan 12 May 12 Sep 12 Jan 13 May 13 Sep 13 Jan May Sep Jan 15 May 15 Danmarks Nationalbank's lending rate Danmarks Nationalbank's rate of interest on certificates of deposit Danmarks Nationalbank's current account rate 1-month Cita-swap rate Source: Danmarks Nationalbank and Thomson Reuters Datastream.

9 No further issuance of government bonds (until further notice) - ample central government deposits 9 Per cent of GDP Note: GDP in 1st quarter 2015 is based on Danmarks Nationalbank s projections. Source: Statistics Denmark and Danmarks Nationalbank.

10 10 Reduction of spreads to Germany Percentage points 0.20 Suspension of issuance of government bonds Dec Jan 15 Feb 15 Mar 15 Apr 15 May year spread 2-year spread Note: Maturity-adjusted interest rates. Source: Nordea Analytics.

11 Average rates on demand deposits Per cent Deposit rate, households Deposit rate, corporate sector T/N money-market rate Source: Danmarks Nationalbank.

12 Declining interest rates Per cent Sep 13 Oct 13 Nov 13 Dec 13 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 15 Feb 15 Mar 15 Households Households (adjusted for loan-based deposits) Non-financial corporations Source: Danmarks Nationalbank.

13 Declining interest rates Per cent Sep 13 Oct 13 Nov 13 Dec 13 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 15 Feb 15 Mar 15 Non-financial corporations MFI's Other financial corporations Insurance and pension Source: Danmarks Nationalbank.

14 MFI cash holding and circulation of notes and coins Kr. billion 30 Kr. billion MFI cash holdings Circulation of notes and coins, excl. MFI cash holdings (rigth-hand axis) Source: Danmarks Nationalbank.

15 1,000 and 500 DKK notes share of total notes in circulation Per cent 58 Per cent ,000 DKK notes 500 DKK notes (right-hand axis) 20 Source: Danmarks Nationalbank.

16 16 Mortgage yields Source: Nordea Analytics.

17 Legal and technical challenges with negative rates 1. Tax issues have been addressed by treating negative rates in the same way as positive rates Any interest payable by bond investors will be deductible, and borrowers must pay tax on any interest received. 2. Some system-related problems linked to negative coupons with reverse payment flows, i.e. investors paying and borrowers receiving interest. For example, the systems have been designed with a view to bond investors receiving interest payments from the issuer and hence there has not been any need for the issuer to know the identity of the bond owner..

18 18 Spreads to the euro area Percentage points Udstedelsesstop for statsobligationer SNB lader CHF flyde ECB annoncerer opkøb Nov Dec Jan 15 Feb 15 Mar 15 Apr 15 May 15 Monetary policy spread Currency swap spread Money market spread Note: Monetary policy spread is the difference between Nationalbankens rate of interest on certificates of deposit and ECB s deposit rate. Money market spread is the difference between the 3-month Cita swap rate and the 3-month Eonia swap rate. Currency swap spread is the 3-month implicit spread between kroner and euro via FX swaps. Sources: Nordea Analytics, Thomson Reuters EIKON, ECB and Danmarks Nationalbank.

19 19 Demand for Danish kroner according to source Kr. billion January February March Home: Insurance and pension sector Home: Corporate and investment funds Abroad Total Source: Danmarks Nationalbank.