The world's longest running 'negative interest rate experiment' may be coming to an end, with Denmark's central bank, one of the world's earliest and longest running countries to implement negative interest rates, preparing to follow in the footsteps of its neighbor, the eurozone, in raising interest rates.

According to the Zhitong Finance APP, due to the sudden hint from European Central Bank officials this month that they will shift towards more hawkish policies, some analysts currently predict that the Danish central bank located in Copenhagen (Denmark has not joined the eurozone and therefore has its own monetary system) will raise interest rates in sync with the European Central Bank in 2023. At that time, Denmark's benchmark borrowing costs may turn positive for the first time since 2014.

Denmark's major commercial banks predict the timing of interest rate normalization

The earliest practitioners in the era of negative interest rates

This will mark the end of an era in which Denmark was the first to adopt a cutting-edge approach, which was subsequently followed in the eurozone and Japan.

Equity asset prices have responded to this,The Danish benchmark stock index has outperformed the European Stoxx 600 index in 8 out of the past 10 years，In addition, housing prices rose by 40% between 2014 and 2021, and mortgage interest rates were even negative at one point.

Denmark even launched the world's first negative interest rate mortgage loan in 2019——The mortgage interest rate is -0.5%, which means that in theory, when a bank lends money to a borrower for use, the borrower pays back less than the borrowed money.

But in Denmark's unusual mortgage market, lenders operate as brokers and charge steadily increasing fees over the years to generate profits. This is also one of the reasons why Lars Rohde, the Governor of the Danish Central Bank, stated that he is not concerned about the bank's ability to respond to low interest rate policies.

Like elsewhere, this policy has caused public disagreement about its impact. Banks are facing increasing pressure on their profits, so they stated in 2019 that they may no longer protect individual depositors from the impact of negative deposit interest rates. This has prompted customers to slow down their savings and investments, sometimes investing in high-risk assets, raising concerns about the vulnerability of household asset allocation exposure to market shocks.

Frederik Engholm, Chief Strategist of Nykredit Bank, stated:“For many people, negative interest rates are an abnormal phenomenon, and I am confident that banks, especially, will be happy to see negative interest rates disappear.”However, he added, 'When we see interest rates rise again, some homeowners may face pressure from financial constraints.'“

The Danish central bank's monetary policy focuses on the stability of the Danish krone, and in 2012, it lowered interest rates below zero for the first time. In 2014, the Danish krone briefly remained in a positive range against the euro, but later fell back again with the European Central Bank's interest rate cuts. The Swiss National Bank, the Swedish National Bank, and the Bank of Japan have also adopted this policy.

The most dramatic period faced by Rohde was during the period of zero interest rates in early 2015, when investors were closely monitoring the Krona's "pegged exchange rate system" and betting that it would break through key levels. The Danish central bank has taken retaliatory measures, lowering interest rates to -0.75% and selling approximately 275 billion kroner (about 42 billion US dollars) to the foreign exchange market.

Pegged exchange rate system

The main task of the Danish central bank is to maintain a 2.25% fluctuation range within the exchange rate range of 7.46038 against the euro. In fact, it only tolerates a fluctuation of 0.1%. It adjusts the exchange rate of the krone to a certain extent through monetary intervention and changing policy interest rates. Although another task of the Danish central bank is to contribute to the stability of the financial system, the bank has not set an inflation target.

Jan Storup Nielsen, Chief Analyst at Nordea Markets in Copenhagen, stated that looking back at the entire monetary policy, the scope and duration of the policy demonstrate the Danish central bank's determination to maintain the stability of its domestic currency.

He also said, "The Danish central bank has emphasized that it is willing to go further and deeper than most people expect to defend the Danish krone exchange rate." "You may expect Denmark to oppose a pegged euro exchange rate system due to the consequences of negative interest rates, but we haven't seen that at all