Banks Just Changed the Rules of the Negative Rate Game for Danes - Threshold now at $110,000
Banks Just Changed the Rules of
the Negative Rate Game for Danes
That’s because one of the country’s biggest banking groups just
changed the rules of the game, by removing the floodgate that had shielded most
retail depositors. Until Friday, only people with roughly $1 million in surplus
cash at their banks were facing a negative rate. Now, the threshold has been
reduced to just over $100,000, with no guarantee it won’t go lower.
Other banks have hinted they’ll follow and economists say the
development marks a major shift in how monetary policy will be felt across the
economy.
Denmark’s latest response to negative interest rates has made it
an even more interesting case study for the European Central Bank. Jan Storup
Nielsen, a senior analyst at Nordea, reckons that many hitherto unknown
consequences of negative rates will finally play out in the real world.
“So far, it’s just been a lot of theories about what will
happen, but now we get a chance to see it in real life,” Nielsen said. “For the
rest of Europe and the ECB this is perfect, because they can let Denmark learn
all the consequences and then see what they should decide.”
Jyske Bank A/S, Denmark’s second-largest listed lender, said it
had no choice but to impose negative rates on all private customers with
750,000 ($110,000) or more. Chief Executive Officer Anders Dam said the latest
Danish rate cut this month means Jyske is now “losing even more money” when it
deposits excess reserves at the central bank at minus 0.75%. Dam also says it’s
possible the rule will be extended to an even larger group of depositors.
Denmark’s monetary policy is designed to defend the krone’s peg
to the euro. But its effect on the broader economy is being closely watched.
Danes have now spent seven years with rates below zero -- a world record -- and
Dam at Jyske says he’s bracing for another eight.
Normally, low rates encourage more household spending as it gets
cheaper to borrow and less appealing to save. In Denmark, negative rates have
led to a surge in mortgage refinancing, but they’ve also coincided with a
record build-up of consumer deposits. And, as is the case in much of the rest
of Europe, inflation is missing in action.
“Households have gotten all the benefits of negative rates so
far, but now they’re starting to see the bad side of negative rates,” Nielsen
said.
For consumers, it’s made more sense to keep their cash in a
deposit account that paid zero, rather than invest in short-term market
products at negative yields. Jyske’s decision now has implications for
everything from debt levels to inflation.
But it may not just be a question of economic theory. In
Germany, lawmakers have debated whether to ban banks from passing negative
rates on to retail depositors. Finland’s regulator has also asked its lawyers
to examine the legality of the practice. In Denmark, politicians have voiced
concerns.
“I’m worried,” said Lisbeth Bech Poulsen, a member of the
Socialist People’s Party on which Denmark’s Social Democrats rely to govern.
Banks “are supposed to increase lending. This entire discussion is a sign that
there is something completely wrong in the economy.” Poulsen, who sits on
parliament’s finance committee, says she wants a “political discussion” about
potentially introducing “a mechanism that prevents banks from imposing negative
rates on their customers.”
But whether banks lend more or consumers deposit less, the
monetary upshot is likely to be broadly the same. Rasmus Gudum, a senior
economist at Handelsbanken in Copenhagen, says passing on negative rates to
more retail clients “will enhance the transmission mechanism.”
Gudum also says that Jyske Bank’s decision was an important step
for a finance sector worried about spooking retail clients. “The stigma has
been removed,” he said.
Nielsen at Nordea says it’s not a given consumers will spend
more. After years of real wage growth, shrinking unemployment and lower
borrowing costs, “the vast majority of Danish households already consume what
they think is appropriate,” he said. Instead, he expects Danes to contribute
more to their pension savings.
At the Danish Consumer Council, a consumer rights group,
economist Ida Marie Moesby worries that “people will take their money and
invest in risky assets.”
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