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.

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.”

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Sweden’s Riksbank raises rates above zero for first time since 2014

Sweden's central bank has increased its key interest rate to 0.25 percent, marking the first time the rate has been above zero for nearly eight years.

Sweden's Riksbank raises rates above zero for first time since 2014

In a press release announcing the move, the bank said that it needed to take action to bring down the current high rate of inflation, which it predicts will average 5.5 percent in 2022, before sinking to 3.3 percent in 2023.

“Inflation has risen to the highest level since the 1990s and is going to stay high for a while. To prevent high inflation taking hold in price and wage developments, the directors have decided to raise interest rates from zero to 0.25 percent,” it said. 

The Riksbank, which is tasked by the government to keep inflation at around two percent, has been caught off-guard by the speed and duration of price rises.

Just a few months ago, in February, it said it expected inflation to be temporary, predicting there was no need to increase rates until 2024.

The last time the key inflation rate was above zero was in the autumn of 2014. 

In the press release, the bank warned that the rate would continue to increase further in the coming years. 

“The prognosis is that the interest rate will be increased in two to three further steps this year, and that it will reach a little under two percent at the end of the three-year prognosis period,” it said. 

According to the bank’s new future scenarios, its key interest rate will reach about 1.18 percent in a year, and 1.57 percent within two years. 

In a further tightening of Sweden’s monetary policy, the bank has also decided to reduce its bond purchases. 

“With this monetary policy we expect inflation rates to decline next year and from 2024 to be close to two percent,” the bank wrote. 

Annika Winsth, the chief economist of Nordea, one of Sweden’s largest banks, said the rate hike was “sensible”. 

“When you look at how inflation is right now and that the Riksbank needs to cool down the economy, it’s good that they’re taking action – the earlier the better. The risk if you wait is that you need to righten even more.” 

She said people in Sweden should be prepared for rates to rise even further. 

“You shouldn’t rule it out in the coming year. Then you’ll have a once percentage point increase which will go straight into fluctuating mortgage rates.”