Denmark boasts the world’s longest history of negative interest rates. However, far from stimulating price growth, the monetary climate has coincided with the longest period of low inflation since the Great Depression, according to Danske Bank AS.
The central bank in Copenhagen, which defends the krone’s peg to the euro, has mostly kept its benchmark deposit rate below zero since mid-2012. Since then, inflation has petered out, with a report on Monday showing Denmark’s consumer prices last month stagnated from the same period last year. Prices for services reached their slowest pace in more than 50 years.
The negative rate environment has brought with it a number of surprises.
Nordea Bank AB Copenhagen-based chief economist Helge Pedersen said it is also worrying that investment has failed to pick up.
“It really tells us that monetary policy hasn’t been that successful,” he said by telephone.
For Denmark, this is set to be the fourth consecutive year with consumer price gains below 1 percent, something not seen since the beginning of the 1930s, Danske economist Las Olsen said.
The Danish economy will only expand 0.6 percent this year, after growing 1 percent last year, Handelsbanken said, adding that growth is likely to be even slower next year, at 0.5 percent.
After a recession in the second half of last year, “the recovery continues to look fragile,” Handelsbanken Copenhagen-based chief economist Jes Asmussen said in a report released yesterday.
Slower growth abroad, a shrinking tailwind for household spending and lackluster investment all mean that growth is not likely to pick up “over the coming years,” he said.
Investors hedging against a sudden price rise, including Denmark’s biggest pension fund ATP, have lost money doing so.
For Denmark’s 2023 inflation-linked bonds bought in the first half of 2014, investors would have lost 10 percent relative to investing in the country’s benchmark 10-year nominal bond.
The phenomenon is global. In Japan, where 10-year bond yields are negative, Bank of Japan Governor Haruhiko Kuroda is signaling policymakers might not achieve their 2 percent inflation target until 2018, despite the prospect of faster economic growth. In the eurozone, European Central Bank President (ECB) Mario Draghi has said inflation is set to reach the target by early 2019, at the latest.
Much of the decline in inflation has come from lower energy prices since 2014. However, an almost 90 percent rebound in Brent crude since January has so far had a limited effect on consumer prices.
The only way to rekindle inflation is to get consumers to expect higher prices in the future and Olsen said the ECB would have little choice other than to delve even further into its stimulus kit.
For now, Denmark’s low inflation has helped boost real wages. However, the general tendency toward continued low prices will ultimately make it difficult for workers to insist on big pay rises when they negotiate new contracts, Olsen said.
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