Denmark ended the world’s longest experiment with negative borrowing costs by raising its benchmark rate following a hike by the European Central Bank.
(Bloomberg) — Denmark ended the world’s longest experiment with negative borrowing costs by raising its benchmark rate following a hike by the European Central Bank.
Policy makers in Copenhagen, whose primary task is protecting the krone’s peg to the euro, increased their current account rate to 0.65% from minus 0.1%, according to a statement on Thursday.
The action by Danish officials mirrored the ECB’s decision earlier in the day to raise its key rate by 75 basis points to rein in soaring inflation. Denmark’s rate increase reduces the number of central banks still deploying negative monetary policy to just two. They include the Bank of Japan, whose governor, Haruhiko Kuroda, has so far sought to keep such stimulus in place.
“The increase in interest rates is good for the Danish economy, which continues to balance on the edge of overheating,” Palle Sorensen, chief economist at Nykredit, said in a note. “The higher interest rates will over time put a damper on the record tight labor market that we have in Denmark at the moment, and thereby reduce the risk of a negative wage-price spiral that could make the current inflationary challenges more permanent.”
While all eight economists polled by Bloomberg had expected Nationalbanken to hike by the same amount as the ECB, some had seen a risk of a smaller move due to the strong krone.
The increase ends the Nordic nation’s foray into subzero territory that began in 2012 as officials sought to deter investors from buying the Danish currency.
That example was followed by neighboring Sweden and the euro area, along with Switzerland and Japan. Starting in 2019, the Federal Reserve faced pressure from then-US President Donald Trump to join them, but ultimately resisted.
The Swiss National Bank might well soon join the Danes and end its subzero stance to fight inflation, now that more tightening in the neighboring euro zone has transpired. The next meeting of policy makers in Zurich is on Sept. 22.
Read More: Subzero Pioneer Denmark Mirrors ECB, Hikes Interest Rate
Denmark’s negative rate policy strained banks, which shielded depositors from the costs for most of the duration. Its immediate economic legacy is an asset-price bubble that has raised concerns over financial stability.
The end of the country’s subzero era coincides with the departure of central bank Governor Lars Rohde, who announced last week his retirement in January following a decade at the helm.
(Updates with analysts’ comments in 4th paragraph.)
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