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World record in negative rates transforms a whole generation

[COPENHAGEN] The world's major central banks may be looking at the exit, but the country with the longest history of negative rates isn't.

The long-term experiment has left its mark on Denmark. After five years below zero, and probably three more to go, the Danes aren't quite the people they used to be just a decade ago. At Danske Bank, economists say the risk is that households will have forgotten what life on the other side of zero was like.

"The world looks fundamentally different from 10 years ago, when Denmark had higher rates," said Jens Naervig Pedersen, senior analyst at Danske in Copenhagen. "The main risk with this long period of negative and very low interest rates is that people may be getting too used to it being the norm."

AAA-rated Denmark uses policy to keep the krone pegged to the euro. It first resorted to negative rates in mid-2012, when Europe's debt crisis had investors flocking to the safest markets. Then, in early 2015, Switzerland's franc crisis was followed by a speculative attack against Denmark, as hedge funds tried to break its euro peg.

Denmark responded by cutting its main rate to minus 0.75 per cent, printing kroner and halting government bond sales.

Meanwhile, and somewhat counter-intuitively, Danes have been building up their savings. That's led to a record current-account surplus of almost nine per cent of GDP. Mr Pedersen says all these factors mean Denmark won't be able to go above zero any time soon.

Tore Stramer, chief economist at Denmark's biggest mortgage lender, Nykredit, says the danger is that many first-time homeowners have only ever seen ultra-low borrowing costs. That's created a "risk that these people are blind to their debt levels."

According to Danske, the European Central Bank won't raise rates until 2019. Denmark will "probably" follow, Pedersen said, but by adding only 10 basis points. The Danish deposit rate, now minus 0.65 per cent, won't go positive until 2020, he says.

But with the krone still trading on the strong side of the peg, the Danish central bank may want to "give the ECB a head start," Mr Pedersen said.