Interest rate pass-through and the demand for cash at negative interest rates

Authors Jensen, Carina Moselund; Spange, Morten
Subject Danish Economy; Recent economic and monetary trends; Financial sector; Business enterprises and households; Financial markets; Monetary policy; Monetary- and foreign-exchange policy; Monetary-policy instruments; Banknotes and coins; Cash outstanding; Monetary conditions; Rates and foreign-exchange; Foreign-exchange market
Type Monetary Review  
Year 2015
Published 7 July 2015
Link to publication Monetary Review, 2nd Quarter 2015
Danmarks Nationalbank's rate of interest on certificates of deposit is currently negative, and Denmark, along with Switzerland, has the world's lowest key monetary policy rates. The article examines whether negative interest rates have an impact on the transmission of monetary policy. It is shown that the pass-through to money market rates has not been weakened by the fact that interest rates are now negative. A high degree of pass-through is key to Danmarks Nationalbank's ability to manage the exchange rate of the krone against the euro. The negative monetary policy interest rates have not been fully passed through to bank deposit and lending rates to households. However, large deposits from firms and institutional investors are extensively paying negative interest rates. In principle, negative interest rates can be circumvented by holding cash, which always offers a nominal return of zero. But the demand for cash has not risen to any significant degree. This reflects the substantial costs of secure storage and transport of large amounts of cash. Furthermore, it is cumbersome and expensive to use cash for transactions involving large amounts or large geographical distances.