DANMARKS NATIONALBANK

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1 DANMARKS NATIONALBANK THE DANISH EXPERIENCE WITH NEGATIVE INTEREST RATES Lars Rohde, Chairman of the Board of Governors, 2 October 217

2 Agenda 1. Background on monetary policy regime 2. Negative policy rates in Denmark 3. Implications for banks 4. Implications for households 2

3 Background on monetary policy regime

4 Unchanged central parity for three decades Kroner per euro Market rate Central rate Fluctuation limits (+/ per cent) Note: Reverse scale. Source: Danmarks Nationalbank. 4

5 Fixed exchange rate introduced after a period of high and volatile inflation Per cent, year-on-year : Exchange-rate peg Danish inflation German inflation Euro-area inflation Source: Statistics Denmark and Thomson Reuters Datastream. 5

6 Danish monetary-policy rates tightly linked to ECB rates Per cent Danmarks Nationalbank 3 2 ECB Note: Key policy rates. Source: Thomson Reuters og Danmarks Nationalbank. 6

7 Rising net foreign assets have reduced money market spread Interest rate spread, per cent Net foreign assets, per cent of GDP Net foreign assets (RHS) Money market spread Source: Thomson Reuters Datastream and Statistics Denmark. 29. september 217 7

8 Strong capital inflows led to a forceful policy response

9 Swiss contagion to Danish FX market 15 January 215 Kroner per euro Swiss announcement Widened bid-ask spread (right-hand axis) Bid-ask spread, pips Increased exchange-rate volatility : 1: 11: 12: 13: 14: 15: 16: Note: Left-hand axis: Reversed scale. Right-hand axis: 3-minutes moving average of bid-ask spreads measured at 5 minutes intervals. Source: OlsenData. 9

10 Sharp increase in foreign exchange reserve in 215 Per cent of GDP Note: In per cent of nominal GDP at yearly frequency. GDP for 217 is from Danmarks Nationalbank s projection. Source: Danmarks Nationalbank and Statistics Denmark. 1

11 Interest rate spread to the ECB became negative Interest rate spread, percentage points 1..8 Sale of FX Purchase of FX -1. Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Monetary policy spread Money market spread Note: Shaded quarters illustrate quarters where Danmarks Nationalbank intervened for more than kr. 5 billion (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. 29. september

12 Danish government bond yields comoves strongly with German yields Per cent Suspension of government bond sales Denmark.5. Germany Note: 9-year par rates. Source: Nordea Analytics. 12

13 Denmark Finland France Germany Netherlands Italy Portugal Spain Sweden UK Switzerland Decline in long-term Danish yields in line with core euro area countries Basis points decline in 9-year government bond yields 12 Core Periphery Floater Note: Aggregate decline in sovereign bond yields in two-day windows following 17 pieces of ECB communication. Source: Thomson Reuters Datastream, ECB and own calculations. 13

14 Implications for banks

15 Strong earnings in largest Danish banks Earnings of largest Danish banks Kr. billion Note: The chart shows financial statements for the Danske Bank, Nykredit, Jyske Bank and Sydbank groups. Source: Danish Financial Supervisory Authority and own calculations. 29. september

16 Interest rate margins are being squeezed Per cent 6 Per cent Term spread 4 3 Lending margin Deposit margin Note: The lending margin is calculated as the difference between the average lending rate and the T/N money market rate. The deposit margin is the difference between the T/N money market rate and the average deposit rate. Lending rates and deposit rates are based on data for Danske Bank, Nykredit, Jyske Bank and Sydbank. The term spread is calculated as the difference between 1-year government bond yield and the T/N money market rate. Data are monthly averages. Source: Danmarks Nationalbank and Nordea Analytics. 16

17 Scope to rebuild interest income when interest rates start rising Kr. billion 75 6 Up to the financial crisis After the financial crisis 45 Administration margins Fees, net 3 15 Interest income, net Note: The chart shows financial statements for Danske Bank, Nykredit, Jyske Bank and Sydbank. Source: Danish Financial Supervisory Authority and own calculations. 29. september

18 Implications for households

19 Households are largely exempt from negative interest rates on deposits Rate of interest on bank deposits Percentage share 1 75 Other types of deposits 5 25 Demand deposits excl. lending-related deposits Non-financial corporations Insurance and pension companies Wage earners, pensioners, etc. Negative Zero Positive Note: "Other types of deposits" refer to time deposits, lending-related deposits, etc. Source: Danmarks Nationalbank. 19

20 Share of cash payments in Denmark is declining steadily Per cent : 2 per cent 8 7 Cash payments Cheque payments Card payments Note: Payments made by smart phones are included in card payments. Source: Statistics Denmark, Danmarks Nationalbank, Finance Denmark, Nets and own calculations. 2

21 Stable circulation of large denomination notes Kr. billion 53 Circulation of 5- and 1, krone notes Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Source: Danmarks Nationalbank.

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

23 Mortgage 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 Source: Thomson Reuters Datastream, Nordea Analytics and Danmarks Nationalbank. 29. september

24 Indebted households consolidated heavily following the financial crisis Median consumption as a per cent of disposable income 15 Borrowers 1 Savers Note: Savers are defined as households whose liquid financial assets (bank deposits, stocks, and bonds etc. excl. pension savings) exceed their financial liabilities and vice versa for borrowers. Source: Statistics Denmark and own calculations. 29. september

25 Danish households are well placed to cope with higher interest rates Lending to households Kr. billion 2, 1,8 1,6 1,4 Total Mortgage loans 1,2 1, Bank loans Bank loans for housing purposes Note: Bank loans funded by mortgage bonds issued, are placed in the mortgage loan category. Source: Danmarks Nationalbank. 29. september

26 Rising house prices but no bubble Index, 26= Owner occupied flats 9 8 Single-family homes Note: Own seasonal adjustment. Source: Statistics Denmark. 29. september

27 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. 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 27

28 DANMARKS NATIONALBANK THANK YOU! 28

SPEECH SPEECH BY GOVERNOR LARS ROHDE AT THE SWISS FINANCE POLICY SEMINAR OF THE FEDERAL ASSEMBLY S FINANCE COMMITTEES

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