Why is Sweden keeping a negative interest rate?

The Local Sweden
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Why is Sweden keeping a negative interest rate?
Swedish kronor. Photo. Jessica Gow/TT

UPDATED: Sweden's central bank (the Riksbank) has announced that the nation's key interest rate, the repo, is likely to remain at its record low of -0.25 percent until 2016.


Economic forecasters had expected the Riksbank to further cut the rate to -0.35, but the bank instead announced that it would remain the same and said that it had opted to expand its bond-buying programme, which in simple terms involves borrowing money to inject back into the economy. 
Sweden is now expected to invest between 40 billion kronor ($4.7 billion) and 50 billion kronor in government bonds, adding to the 40 billion kronor it has already spent since February.
The Riksbank said that the current negative interest rate was already achieving results and added that it was not expected to rise before 2016.
"The expansionary monetary policy is having a positive impact on the Swedish economy and inflation has begun to rise," it wrote in a statement.
Prices of everyday goods and services have been stagnant for two years in Sweden and the government hopes that its low interest rate and bond strategy will help boost inflation. It is argued that this in turn will improve the country's economic prospects.
While Sweden weathered the global economic crisis better than many EU nations, the krona has recently plummeted against the pound and the dollar and there is evidence that Swedes are currently choosing to save rather than spend their spare cash.
Sweden cut its interest rates to a record low of -0.25 in March this year.
Negative rates work differently to positive interest ones when borrowers pay money lenders an interest rate, usually an annual percentage on the total amount of money borrowed. Meanwhile savers putting money into a bank can normally expect to earn interest on that cash.
When interest rates are negative, this relationship is reversed, so lenders - i.e. banks - have to pay to lend money or to make an investment. The basic idea behind negative rates is to stop organizations or people from making risky investments or transactions that could impact on the wider economy.
The krona rose against the euro, the pound and the dollar following the Riksbank's announcement on Wednesday.


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