Danish negative interest rates: Here’s what you can do about them

Much has been discussed regarding negative interest rates on deposits which many Danish banks have introduced for their retail customers. Recently, we have seen thresholds for charging negative interest reduced to as low as 100,000 Crowns. Today, around 35% of total deposits by retail customers in Denmark are already subject to negative interest rates, and many more Danes will be hit by negative rates if thresholds are lowered.

What are negative interest rates?

Negative interest rates, simply put, mean that fees for borrowing money are reduced down to below zero. Although normally, if you have savings in the bank, the bank pays you interest, if interest rates are negative, the reverse is true. With the newest change in Danish bank policies as stated above, which will have negative interest applying to even more savings accounts, many Danes will be forced to pay their bank just for holding their money.

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Interest rates are determined by central banks, and lowered interest rates are often implemented in times of economic crisis to reduce the cost of loans for businesses. A negative interest rate is also meant to encourage consumers to spend their money rather than hoarding it in the bank, where they are in essence losing money. The intention is to help businesses generate more income, in turn, creating more jobs and boosting the economy overall.

How do negative interest rates work?

In response to the current financial crisis, interest rates are at, or very near to, an all-time low in almost every global market. All over the world, central banks must decide how low they dare to take these rates, since anything below zero may have significant economic consequences.

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For businesses borrowing money to see them through the crisis, negative interest rates are helpful. But consumers, who would rather be more cautious with their spending at such a time, are less likely to appreciate the move. When commercial banks must pay the central bank interest on capital instead of being paid, the banks may pass these charges on to clients either in the form of a negative interest rate or increased banking fees.

As it is, consumers already receive low or no returns on their capital with savings accounts. With negative interest, they find themselves having to actually pay a bank to look after their money, instead of accruing interest on it. Although the central bank’s intention may be to get consumers to spend that money, it could actually drive savers to withdraw their capital and seek to reinvest it elsewhere.

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Which countries are using negative interest rates?

Denmark became the first country in the world to impose negative interest rates back in 2012. By 2019, most Danish banks began introducing negative interest rates on private clients’ deposits. Since then, other countries have implemented negative interest rates as well, including France, Germany, Switzerland and Japan. The possibility has also been subject to considerable debate in the UK, but so far has not been adopted.

The European Central Bank (ECB) began charging negative interest in 2014, but most commercial banks resisted passing losses on to customers directly. The pandemic, however, with its vastly increased savings rates, has changed this situation. European commercial banks are finding it harder and harder to absorb the negative interest rates which the ECB charges them.

What alternatives are there to paying negative interest?

In a negative interest environment, investing in equities might be considered a very attractive alternative. Although all investing does carry risk, and each individual needs to consider the risk level with which they are comfortable, the fact is that customers being charged negative interest are already losing money in their accounts at the bank. Investing in stocks, especially over the long term, could provide opportunities for growth not found in savings accounts with negative interest charges. 

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