When will interest rates return to “normal”?

Mikkel Høegh, Director, Mortgage Credit, at Jyske Realkredit, gets asked this question a lot.


Earlier this year, Jyske made history by being the first mortgage institution in the world to issue a fixed rate callable bond with a negative coupon, garnering massive amounts of international attention in the process. Since that time, he can’t enter a room without getting asked the question, “When will interest rates be normal again?” His answer: “This is normal. The interest rate is just a price, driven by supply and demand.” In other words, the interest rate we’re seeing at the moment is a perfect reflection of the conditions that drive the interest rate.

In this article, we will examine three elements that are crucial to understanding the current interest rate, and why many economists, Mikkel Høegh included, believe it will continue.


This article is based on a presentation given by Mikkel Høegh at VP Securities Market Advisory Group (MAG) meeting in November 2019. MAG is a knowledge-sharing forum open to all VP Securities customers and stakeholders.

The purpose of these meetings is to share information relevant to attendees, including developments and trends in the Pan European CSD market.

The next MAG meeting will be held on 18 March 2020.

Element #1: The structure of the economy

One of the first factors to keep in mind is that negative interest rates are not new. “When we look at the historical development of the real interest rate, we can see that a negative interest rate is not unusual,” observes Mikkel Høegh. “For example, at the start of the 1980s, the beginning of the oil crisis, we also had negative interest rates.”

Second, the current interest rate is a true reflection of market conditions. “One of the figures that economists are studying closely at the moment is the natural real interest, a figure published by Denmark’s National Bank to measure the extent to which the real interest rate is on the right level when compared to the business cycle,” Mikkel Høegh explains. “When we look at this figure, we can see that we are exactly where we should be.” (See Figure 1 below)

There are several factors that contribute to the decreasing real natural interest rate. One is changes in international saving behaviour. Emerging market economies are saving more, and these savings are often placed in bonds from more developed economies. This increased demand for bonds drives down the interest rates. We are also seeing an increase in savings in the world’s developed economies. For example, the United States (the richest 1per cent), China and Japan account for almost 60 per cent of the world’s savings. And in the EU, an increased life expectancy amongst residents is also leading to increased savings. When people expect to live longer, they save more, which puts further downward pressure on the interest rate.

History also teaches us a valuable lesson about what negative interest rates reveal about the overall health of the economy. “So one thing history tells us is that we have negative interest rates every time we have a big economic crisis,” Mikkel Høegh states.

Element #2: The business cycle

As most students of the financial markets could tell you, everything is a cycle. We’ve been in an “up” period for some time now, and the question on every economist’s mind is when we will have the next downturn. Many believe we are on the cusp of the next recession, which will bring with it a slowdown in growth, lower prices and increasing unemployment, all of which will drive interest rates even lower. Why the gloomy outlook? Many of the world’s largest economies, such as the United States, Germany and France, have all posted poor economic growth numbers. On top of that come the trade war between the US and China and the uncertainty surrounding the trade relationship between the UK and the EU. Added to this is the unstable geopolitical situation, such as the recent attacks on oil production. All of this instability prompts investors to search for “safe havens”, moving from stocks to bonds and, again, putting further downward pressure on interest rates. As Mikkel Høegh explains, “Economists love to disagree on different topics, but what we can agree on is that trade is good, more trade is better and free trade is best. So a trade war means we will experience some type of recession.”

The current interest rate level means the coming recession will differ from previous ones. “This time around we won’t have the necessary monetary policy in place at the central banks to decrease the interest rate and kickstart the economy,” observes Mikkel Høegh. For example, the Federal Reserve has already lowered the interest rate three times this year, and many believe it will cut it again before the end of the year. The European Central Bank (ECB) will also drive the interest rate further down by printing new money and using it to purchase bonds. The difference is that the US had raised the interest rate prior to the recent spate of rate cuts, while the interest rate in the EU remained low. This means that the ECB’s efforts will drive the interest rate even further into negative territory.

Element #3: Denmark and the fixed exchange rate

Although Denmark is not a part of the Euro, the fixed exchange rate policy means the fates of the two currencies are intertwined. And while the Danish kroner is quite strong when compared to the Euro, the Danish economy will inevitably be impacted by the coming recession. However, all of the factors driving an increase in bond investments have been a positive development for the Danish investment market, especially the mortgage credit bond market. “We have seen a marked increase in interest from international investors,” Mikkel Høegh states. “A few years ago, 10per cent of Danish bonds were owned by international investors. Now, 25 per cent are internationally held, and if we look at fixed rate bonds, it’s almost one-third that are owned by international investors. If you then look at specific series, 50 per cent of the 1per cent bonds are owned by international investors.” According to Mikkel Høegh, Japanese pension funds are particularly interested in the Danish mortgage and property market. “They look at our 200-year history without loss and they find that very appealing.”

All factors seem to point in the direction of continued negative interest rates, and of further cuts yet to come. Investors and consumers will continue their saving behaviour, choosing to place their money in more “stable” instruments, such as bonds, and Denmark seems well poised to benefit from this trend, and weather the next economic storm. However, as Mikkel Høegh points out, nothing is certain. “We’ve been surprised many times before. But when we look at these factors and current market conditions, it’s difficult to see what would make the interest rate rise at this point.” So, welcome to the “new normal”.
When will interest rates return to normal_figure1

Søren Milbregt

Senior Relationship Manager

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