Why is Sweden keeping a negative interest rate?

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.

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


Swedish economy to grind to a halt as interest rates kick in

Sweden faces an economic slump next year that will see economic growth grind to a complete stop, Sweden's official government economics forecaster, has warned.

Swedish economy to grind to a halt as interest rates kick in

Sweden’s National Institute of Economic Research, which is tasked with tracking the business cycle for the Swedish government, warned in its quarterly forecast on Wednesday that greater than expected energy prices, interest rate rises, and stubborn inflation rates, Sweden was facing a significant downturn. 

The institute has shaved 1.6 percentage points off its forecast for growth in 2023, leaving the economy at a standstill, contracting -0.1 percent over the year. 

The institute now expects unemployment of 7.7 percent in 2023, up from a forecast of 7.5 percent given when in its last forecast in June.

“We can see that households are already starting to reign in their consumption,” said Ylva Hedén Westerdahl, the institute’s head of forecasting, saying this was happening “a little earlier than we had thought”. 

“We thought this would have happened when electricity bills went up, and interest rates went up a little more,” she continued. 

The bank expects household consumption to contract in 2023, something that she said was “quite unusual” and had not happened since Sweden’s 1990s economic crisis, apart from in the immediate aftermath of the Covid-19 pandemic. 

This was partly down to a five percent reduction in real salaries in Sweden in 2022, taking into account inflation, which the institute expects to be followed by a further two percent fall in real salaries in 2023. 

If the incoming Moderate-led government goes ahead with plans to reimburse consumers for high power prices, however, this would counterbalance the impact of inflation, leaving Swedish households’ purchasing power unchanged. 

The institute said it expected inflation to average 7.7 percent this year and 4.6 percent in 2023, both higher than it had forecast earlier.

Sweden’s Riksbank central bank this month hike its key interest rate by a full percentage point, after inflation hit 9 percent in August, the biggest single hike since the 1990s.