by Kaisa Stucke & Bill O’Grady
When ECB President Mario Draghi was asked at a recent press conference if the central bank would consider a negative deposit rate, Draghi answered that the institution has approached the question “with an open mind.” This topic is fascinating in terms of alternative options in monetary policy as well as the possible geopolitical ramifications if a major currency country undertakes a below-zero rate program. Looking back at recent history, there are two examples of European countries that have instituted negative term deposit rates since the 2008 crisis. Denmark first utilized a negative deposit rate of -0.2% in July 2012 and then adjusted it in January 2013 to slightly less negative, but it has remained at -0.1% since. Sweden employed a negative term rate between July 2009 and September 2010. In both cases, the rate cut was a reaction to the appreciating currency due to large capital flows out of the Eurozone and into the perceived safety of non-Eurozone European Union countries.
We will turn our attention to Denmark to study its decision to undertake the below-zero rate, the specifics of the situation that prompted it and the effects of the negative rate on financial conditions and the broader economy. We will then briefly look at the possibility of a below-zero rate policy for the ECB and, most importantly, the geopolitical ramifications of the decision by the world’s second largest currency block to ease into unknown consequences of negative rates to stimulate the economy.