At the beginning of the year, Danmarks Nationalbank reduced the rate of interest on certificates of deposit to -0.75 per cent with a view to keeping the krone stable against the euro. This is an all-time low and Denmark, along with Switzerland, has the world's lowest monetary policy rates. However, monetary policy interest rates are also negative in the euro area and Sweden.

Whereas negative rates of interest were previously regarded as a curiosity, they have now almost become "business as usual". The negative rate of interest on certificates of deposit has not weakened the pass-through from Danmarks Nationalbank's interest rates to money market rates. That is essential, as money market interest rates determine the exchange rate of the krone against the euro.

While the pass-through to money market rates remains unaffected, there has been a shift in Danmarks Nationalbank's relative weighting of intervention in the foreign exchange market (purchase and sale of kroner against foreign exchange) and changes in monetary policy rates. This is because Danmarks Nationalbank can sell unlimited amounts of kroner when foreign exchange is flowing into Denmark. Danmarks Nationalbank's sale of kroner was an important factor in relation to keeping the value of the krone stable in January and February 2015, when investor demand for kroner rose sharply. By contrast, there is a limit to how much more interest rates can be reduced.

The banks are adapting to the situation

Negative rates of interest may squeeze bank earnings, but the banks are adapting to the new situation. Deposit rates fell substantially in the first months of 2015. The decline in interest rates at the beginning of 2015 also led to rising bank earnings as more customers chose to remortgage.

The banks have not passed on the negative rates of interest to retail customers. This presumably reflects the risk that negative rates of interest would make some households want to withdraw their deposits in cash. Handling large cash amounts would entail substantial costs for banks, as their facilities are not designed for this. Conversely, large deposits from corporate customers and institutional investors such as insurance companies and pension funds are extensively paying negative interest rates.

The negative rates of interest have also resulted in very low interest rates on mortgage loans. Interest rates on loans with fixed interest periods of up to and including three years fell into negative territory at the beginning of the year. However, administration margins and brokerage fees mean that borrowers still have to pay for their loans.

No unusual increase in the circulation of cash

In principle, negative rates of interest can be circumvented by holding cash rather than depositing money in a bank account. But in practice holding large cash amounts entails substantial costs, including costs for secure storage and transport. Furthermore, it is cumbersome and expensive to use cash for transactions involving large amounts or large geographical distances.

Demand for cash has not been unusually high. For households, this reflects that their bank deposits do not accrue interest at negative rates. But banks and firms to not seem to be switching from bank deposits to cash either.