In an announcement on Thursday, the Danish central bank, the Danmarks Nationalbank, announced that it has taken its main deposit rate to -0.35% from -0.2%.
This marks the second time in just four days that the Danmarks Nationalbank cut rates, as the previous move to take the deposit rate to -0.2% was made on Monday.
This announcement comes amid what has been a hectic week for central banks, with the Bank of Canada unexpectedly slashing rates on Wednesday and the European Central Bank announcing a quantitative easing program on Thursday morning.
On Thursday, Business Insider’s Tomas Hirst took a look at some of the reasons why central banks around the world are cutting rates, namely poor economic growth and a lack of inflation.
The lack of inflation can be (largely) explained by the decline in the price of oil, as oil prices have fallen more than 50% since June. The decline in oil prices weighs on gas prices, which make up a large part of consumer spending — particularly in the US.
And the fear economists and central bankers have towards deflation is that it creates a “deflationary spiral” in which economic growth in stunted. As Tomas explains:
“[I]f consumers and businesses start to expect that falling prices are here to stay they could either hold back spending in the hope of lower prices at a later date or cap wage increases. In those circumstances low inflation could lead to self-fulfilling deflation, which would mean lower demand for goods and services and reduced economic growth.”
Back in December, we highlighted comments from hedge fund manager Ray Dalio, who talked about how the modern economic cycle is based on “spread,” or basically how much investors are being compensated for taking risks.
“If you look at capitalism,” Dalio said, “it’s the spread that is the transmission mechanism: everybody’s looking for spread. And it’s that spread that makes lending go through.
“And then there’s lowering interest rates, which lowers debt service payments. That dynamic that capitalism is based on is going to become decreasingly effective in the longer-term future.”
Over the last few years, bond yields around the world have tumbled, making returns harder to come by for many investors. And in response, central banks have taken down interest rates in a move to encourage lending.
But as lending activity has failed to meaningfully increase, central banks have begun charging depositors for hanging on to their money. Which is decidedly not the dynamic that the economy needs to keep the engine running.
As one bond dealer said in an email to Business Insider on Thursday following the ECB’s announcement: “The bond markets are untradeable … Central Banks have ruined the bond markets across the globe.” Which is exactly the kind of negative sentiment central banks are hoping to avoid.
Following this news, the US dollar was rising sharply against the Danish krone.
Here’s the full statement from the Danmarks Nationalbank:
Effective from 23 January 2015, Danmarks Nationalbank’s interest rate on certificates of deposit is reduced by 0.15 percentage point. The lending rate, discount rate and the current account rate are unchanged.
The interest rate reduction follows Danmarks Nationalbank’s purchase of foreign exchange in the market.
Danmarks Nationalbank’s interest rates are:
Lending rate: 0.05 per cent
Certificate of deposit rate: -0.35 per cent
Current account rate: 0.00 per cent
Discount rate: 0.00 per cent.
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