Negative interest rate to boost growth: Riksbank

Sweden's central bank has taken the unusual step of keeping its fixed interest rates pegged below zero in a bid to stimulate the economy.

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The Riksbank also kept is main benchmark rate on hold at 0.25 percent on Thursday as it raised its economic growth forecasts for this year and next, chiming with similar
moves in neighbouring Norway and by the European Central Bank.

"The signs of a turnaround in the economy have become increasingly clear but the recovery is from a low level," it said in a statement.

In July, the Riksbank fixed interest rates at minus 0.25 percent on certain deposits kept by the commercial banks at the central bank.

With the negative rate, banks are effectively fined if they hoard unused funds in the central bank's coffers -- a way of punishing them for a conservative lending policy at a time when the authorities want to ensure the economy gets easy credit.

Banks are usually paid interest on these deposits.

"It's better for a bank to be active... (rather) than just sit on the money," Riksbank governor Stefan Ingves told AFP.

Invges at the same time noted that the move was largely symbolic, being only a small element in the central bank's armoury while its other interest rates were above zero.

"It is more symbolic because it's a system which de facto isn't really used," he said. "It shows that this is technically possible to do but it's in no way a major component in the way we execute monetary policy today."

Lars Svensson, deputy central bank governor and an expert on low interest rates, said in the minutes on the July decision that hoarding cash was costly and that there was "nothing strange about negative interest rates."

Central banks around the world have slashed interest rates since the onset in late 2007 of the worst global slump since the 1930s sparked by an unravelling of speculative investments linked to property, especially in the United States.

With rates in many countries at or near zero, governments have also pumped hundreds of billions of dollars into their economies, with some officials openly contemplating the possibility of using negative interest rates to drive money held in the banks back out into the system.

Bank of England governor Mervyn King recently refused to rule out following the Swedish example.

"It's an idea we will certainly be looking at, whether the effectiveness of our asset purchases could be increased by reducing the rate at which we remunerate reserves," King said on August 12th.

"The (Swedish) central bank has done all it could to persuade banks to lend money to companies rather than to deposit it at the central bank," said Henrik Mitelman, chief strategist at Stockholm-based bank SEB.

"From that viewpoint, it was a bold, brave decision, a bit of an experiment," he said.

As it held rates unchanged, the Riksbank said it now expected the economy to shrink 4.9 percent this year before recovering to growth of 1.9 percent in 2010.

In July, it forecast that the economy would shrink 5.4 percent in 2009 and then grow 1.4 percent next year.

The Riksbank warned that although the economy was showing signs of recovery, "the labour market will lag behind and employment will not begin to rise until 2011."