Once, it was a good thing to have money in the bank.
Now, Danish companies pay taxes early to rid themselves of cash. At one small Swiss bank, customer deposits will shrink by an eighth of a percent a year.
But it isn’t all bad. Some Danes with floating-rate mortgages are discovering that their banks are paying them every month to borrow, instead of charging interest on their home loans.
Such is life in the upside-down world of negative interest rates, in which banks impose a levy on customers to hold their money, instead of paying interest on deposits.
The European Central Bank last week pushed down its deposit rate—what it pays commercial banks—to minus 0.3% from minus 0.2%.
Three of the eurozone’s smaller neighbors—Denmark, Sweden and Switzerland—have pushed their interest rates deeper into negative territory in response to the ECB’s rate cuts, resulting in a number of unusual outcomes with ramifications for big businesses and consumers and everyone in between. These countries offer a window into what might happen if the eurozone travels further down the path of negative rates.
“I don’t think we’ve seen the last of this trend,” said Jes Asmussen, chief economist for Denmark at lender Handelsbanken. “When I trained as an economist, negative rates weren’t in the textbooks. But that’s the world we live in now, and it hasn’t stopped turning,” he said.
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A scenario of negative interest rates wasn’t supposed to happen. In economics, zero is the floor. But Europe’s economic stagnation has proved so long and intractable that the region’s central banks are cutting interest rates to spur their economies. If it helps to move rates from 1% to 0.5% and 0.5% to 0%, why not try minus 0.5%?
Europe’s negative-rate adventure has only just begun, and it is far from clear how it will end. The ECB’s negative deposit rate has helped bring down the value of the euro, a good thing for European exporters as their goods are less expensive for overseas buyers. But Europe’s economy still musters only meager growth. And inflation is still stuck near zero.
But a fundamental question remains: Is there economic salvation in negative rates? If central banks push deeper, will growth return? Or is the weird nature of negative rates a prelude to perverse consequences—to hoarding of cash, bubbles in assets like housing, and uncontrolled inflation?
In theory, negative rates at a central bank trickle down to consumers or businesses by encouraging lending. That makes cash a sort of stimulative hot potato: Everyone should want to use it, not hold it.
So far, the record has been patchy. Bank lending has risen modestly in the eurozone, aiding a slow and steady economic recovery. But inflation hasn’t returned. Prices rose just 0.1% in November. Sweden, too, has been stuck with inflation close to zero since 2013, despite joining the negative-rate club in February. The ECB has an inflation target of just under 2%.
In Switzerland, the central bank had long tried to keep the Swiss franc from rising too much against the euro by creating new francs and using them to buy the common currency. But early this year, uneasy with the volume of foreign assets it had acquired, it stopped.
To help soften the blow of a stronger franc, which stifles Swiss exporters, the central bank turned to negative rates, which typically would make a currency less attractive to hold. But the franc surged against the euro and has since settled into a steady range about 11% stronger than where it was.
Denmark, by contrast, has had better success using negative rates to stabilize its currency. The rates helped beat back a flurry of speculative bets on an appreciating Danish krone, themselves spurred by the ECB’s rate-cutting moves. Growth in Denmark is comparatively robust. The economy is expected to expand 1.6% this year.
Still, subzero rates in Denmark and Sweden have helped fuel a surge in house prices, prompting fears of a bubble in major cities. The average price of a Danish apartment climbed 8% in the first half of 2015. The cost of Swedish apartments is 16% higher than a year ago.
And other peculiar consequences are sprouting. In Denmark, thousands of homeowners have ended up with negative-interest mortgages. Instead of paying the bank principal plus interest each month, they pay principal minus interest.
“Hopefully, it’s a temporary phenomenon,” said Soren Holm, chief financial officer at Nykredit, Denmark’s biggest mortgage lender by volume. Mr. Holm said the administration of negative rates has gone smoothly, but he isn’t trumpeting the fact that some borrowers get paid. “We wouldn’t use it as a marketing tool,” he said.
Negative rates have cost Danish banks more than 1 billion kroner ($145 million) this year, according to a lobbying group for Denmark’s banking sector.
“It’s the banks that are paying for this,” said Erik Gadeberg, managing director for capital markets at Jyske Bank. If it worsens, Jyske might charge smaller corporate depositors, he said, then maybe ordinary customers. “One way or another, we would have to pass it on to the market,” Mr. Gadeberg said.
In Switzerland, one bank already has. In October, Alternative Bank Schweiz, a tiny lender, sent letters to customers with some bad news: They were going to be charged for keeping money in their accounts.
The Swiss central bank has a deposit rate of minus 0.75%, and Martin Rohner, chief executive of ABS, decided enough was enough. The costs were eating up the firm’s entire profit, he said. He set a rate of minus 0.125% on all accounts.
Major banks in Switzerland, though, have shied away from charging retail depositors, although many charge large corporate clients. But if rates go lower into negative territory, that could change.
There is no hard limit on how low they can go. If commercial banks start widely imposing negative rates on retail customers, physical cash might look attractive. After all, it has a rate of 0%, although it isn’t without cost. one needs vaults and guards to store it, and it is no good for buying merchandise online.
Still, some economists said negative rates can be a powerful stimulative tool, if central banks can fully harness them.
Miles Kimball, an economist at the University of Michigan, has been preaching the gospel of deeply negative rates to central banks. When demand for money is low, as it is during a deep recession, Mr. Kimball argues, central banks should make borrowing as easy as necessary, even if that means paying banks to do it.
Mr. Kimball has a novel way around the physical-cash problem: make bank notes less valuable. He proposes that the Federal Reserve set an exchange rate between bills and electronic money. If it wanted, say, a minus 1% rate, it could decree that a $100 bill deposited in a year’s time would yield a $99 credit to a bank account.
The Fed has kept its key interest rate near zero, in positive territory, for the past seven years. Fed Chairwoman Janet Yellen has signaled that the central bank is ready to raise rates at its policy meeting next week.
The interest in such schemes isn’t purely academic. With rates still at zero in much of the developed world years into the postcrisis recovery, central bankers may find themselves facing the next recession without much room to cut.
“It’s wrong to say central banks have run out of ammunition,” said Mr. Kimball. “Negative rates can be on tap before the next recession. There’s no limit to how deep we can go.”
Write to Tommy Stubbington at tommy.stubbington@wsj.com