The encyclopedia · Finance & Accounting · Financial decision · 2012–2016
Denmark went negative on bank deposits to defend the krone peg
In July 2012 Denmark set its certificates-of-deposit rate to -0.20%, the first negative official rate in its history, to hold the euro peg.
Danmarks Nationalbank
The solution
During the euro-area crisis investors flocked into Danish kroner as a safe haven, threatening the krone's peg to the euro. In early July 2012 Danmarks Nationalbank lowered its certificates-of-deposit rate to -0.20% — the first negative official interest rate in its nearly 200-year history, and nearly unique internationally.
The negative CD rate meant banks paid the central bank to hold their liquidity. Banks held about DKr200 billion on deposit, so the move cost them roughly DKr300 million a year — and they had to widen lending margins or pass costs through, since retail deposit rates could not go below zero.
The mechanism worked on markets: Danish two-year government yields turned negative (about -0.22%), and mortgage rates fell sharply — one-year mortgage bonds were expected to yield about 0.25% versus 1% the year before — easing the pressure on the currency.
Why it worked
- Charging banks to park kroner cooled the speculative inflow.
- It defended the peg without abandoning the fixed-rate commitment.
- Mortgage rates fell, cushioning households.
- The first-mover experiment showed negative rates were operable.
What can be applied
When capital inflows threaten a fixed exchange rate, a negative deposit rate taxes the inflow at its source — the bank's own parking space at the central bank.
Aftermath
Denmark kept the CD rate negative for years, cutting it to -0.75% in February 2015 during renewed pressure, and the krone peg to the euro held through the crisis; the Nationalbank's own Monetary Review documented how the negative CD rate reshaped money-market behaviour.
Sources
- Negative Interest Rates - Part 1
- World Watches as Danes Venture Below Zero
- The money market at pressure on the Danish krone and negative interest rates
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