Financial Instability Continues: Denmark Sets Negative Interest Rate for the First Time

Real interest rates, the rate of return you receive on your savings after adjustment for inflation, have been negative for a long time.  But this is the first time Denmark has set nominal interest rates below zero.  People who have been paying attention to inflation figures have noticed the negative rate of return for holding Euros (and dollars).  Those people are buying gold, silver, and other commodities that act as a counterbalance to inflation and, in times of crisis, can actually increase in purchasing power.  For the people who haven’t really focused on the markets and their investments, the flip to negative nominal rates should be a wake up call.  A negative nominal interest rate means the bank is taxing you to hold your money, in addition to any outstanding fees they normally charge to keep accounts open and change money.

That people still hold significant amounts of money in a bank when rates are negative suggests these people don’t know what to do with their money to protect it from inflation and keep it safe from the bankers’ next collapse.  Some will choose to take their money out of the bank and hold it in cash to avoid paying the penalty that negative interest rates impose on savers.  The banks would like to keep “consumers” spending instead of saving.

* Central bank cuts main policy rate by 25 bps to 0.20 pct

* Cuts CD rate by 25 bps to negative 0.20 pct

* Keeps current account rate unchanged at 0.0 pct

* Lifts current account limits (Adds governor quotes, details; updates crown rate)

By John Acher and Ole Mikkelsen

COPENHAGEN, July 5 (Reuters) – Denmark’s central bank cut interest rates by a quarter point on Thursday, mirroring the European Central Bank’s action earlier in the day, putting one of its secondary rates below zero for the first time in history.

Yields on some short-end Danish government bonds had already turned negative earlier, as investors fearful of turmoil in the euro zone have piled into non-euro assets, including Danish bonds, and are were willing to pay to shelter their money.

The Nationalbank cut its lending rate to 0.20 percent from 0.45 percent and lowered its certificates of deposit (CD) rate to negative 0.20 percent from 0.05 percent to match the ECB’s move and to curb strength in the Danish currency.

“When the ECB moves downwards, we are moving in parallel,” central bank Governor Nils Bernstein told Reuters.

“Our main concern is the pegging of the crown to the euro, and therefore we want to make sure that the effect of the interest rate is felt,” Bernstein said.

EU member, but euro outsider, Denmark conducts a fixed exchange-rate monetary policy to keep the crown steady within a narrow band to the euro, and the central bank changes interest rates for the sole purpose of carrying out that mandate.

The negative CD rate means that banks must pay the Danish central bank for the privilege of depositing money with it, which is a reflection of the high uncertainty in financial markets as Europe’s debt crisis has deepened.

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