The current beggar thy neighbour policy the world is following has forced Denmark to follow suit with negative interest rates.

COPENHAGEN, July 5 (Reuters) – Denmark’s central bank cut interest rates by a quarter point on Thursday, mirroring the European Central Bank’s action earlier in the day, putting one of its secondary rates below zero for the first time in history.

Yields on some short-end Danish government bonds had already turned negative earlier, as investors fearful of turmoil in the euro zone have piled into non-euro assets, including Danish bonds, and are were willing to pay to shelter their money.

The Nationalbank cut its lending rate to 0.20 percent from 0.45 percent and lowered its certificates of deposit (CD) rate to negative 0.20 percent from 0.05 percent to match the ECB’s move and to curb strength in the Danish currency.

The Swiss Central Bank last year pegged the swiss franc to the euro and the Danes arehaving to make moves to curb the side effects of euros weakness.

“When the ECB moves downwards, we are moving in parallel,” central bank Governor Nils Bernstein told Reuters.

“Our main concern is the pegging of the crown to the euro, and therefore we want to make sure that the effect of the interest rate is felt,” Bernstein said.

The affects on the banks for now are small but its more what this move represents.

The negative CD rate means that banks must pay the Danish central bank for the privilege of depositing money with it, which is a reflection of the high uncertainty in financial markets as Europe’s debt crisis has deepened.

Can the banks handle it?

He said he expected the effect of a negative interest rate on the economy overall to be marginal. “If there is an effect, it might be slightly negative but it’s difficult to say…We are burdening the banking system in a situation where they have increased (loan) losses.”

And they may get worse.

Danske Bank senior strategist Kasper Kirkegaard said that the Nationalbank had demonstrated that negative rates are not a problem for it, and it could cut even deeper.

“And if the demand for the Danish crown and Danish government bonds continues, the interest rate can become even more negative,” Kirkegaard said. “It is far from certain that we have seen the last rate reduction this year.”

Source: Reuters (