On July 5th, The central bank of Denmark (Danmark’s Nationalbank) cut its key interest rate by 0.25% following a similar rate reduction by the European Central Bank. Normally, this act would garner little attention, except for the fact that the benchmark certificate of deposit rate is now negative 0.2%. This means that Danish banks are now in the unusual position of having to pay money in order to deposit money at the central bank.
Why is this happening? The mandate of the central bank of Denmark is to keep the crown currency steady against the euro, thus creating a basis for low inflation (Denmark is not a member of the 17-nation eurozone). Recently, the Nationalbank has struggled to keep the crown from strengthening as investors have sold euro assets in favor of non-euro assets, including Danish bonds. By lowering the effective interest rate, they are attempting to make Danish bonds less attractive to investors.
In short, this is just another example of the high level of uncertainty regarding the ability of Europe to hold things together in the face of high debt levels. The chief economist for Realkredit Danmark, Christian Hilligsoe Heinig, put it this way, “The lowest interest rate levels in the history of the Nationalbank’s existence since 1818 can be attributed to the … economic crisis in the eurozone.”
Taking a broader view, central banks around the world are running out of “policy bullets” to stimulate the global economy and maybe that’s a good thing. Sooner or later, fiscal problems need to be addressed. Kicking the can down the road is not a prudent long-term strategy. In current society, there is an unhealthy focus on the short-term (from corporate profits to the latest diet trend). We need to shift our thinking and strike a better balance between short-term and long-term goals. This is true for governments, businesses, and households. Achieving significant long-term goals usually involves some short-term sacrifices along the way. This is how we grow–how we learn–how we get better. Of course, the first step toward achieving long-term goals is to create a long-term plan.
Give us a call when you are ready to take that first step.