Going it alone: Sweden ends five years of negative rates with hike to zero

Sweden’s central bank ended five years of negative interest rates on Thursday when it raised benchmark borrowing costs by a quarter point to zero, defying an economic slowdown and global uncertainty.

The increase from -0.25 per cent makes the Riksbank the first of the central banks that pushed rates below zero to inch its way back to what was long considered the floor for interest rates.

The move has been questioned with Sweden's inflation below target,  industrial activity at its lowest since 2012 and business confidence falling.
The move has been questioned with Sweden’s inflation below target, industrial activity at its lowest since 2012 and business confidence falling.Credit:Peter Braig

Rates are still negative in the euro zone, Japan, Denmark, Switzerland and Hungary, and with the exception of Hungary, are expected to remain so for some time to come.

Riksbank Governor Stefan Ingves said negative rates had worked well, boosting inflation and the economy.


“But it is a completely different question what would happen in an economy if you had negative rates for a very long period,” he told reporters.

Negative rates have boosted real estate prices, households and corporations have taken on more and more debt, threatening a financial meltdown if there is an unexpected shock. Pension funds and insurers have to take greater risks to meet their liabilities.

Cheap loans have also kept alive “zombie” firms, which otherwise would have gone to the wall, reducing overall productivity in the economy.

Some critics doubt negative rates should be used at all, arguing they have failed to push up inflation in the euro zone or Japan sustainably and that they create more problems than they solve. Others, like Switzerland’s central bank, say that they are an essential policy tool.

The Swedish crown gained against the euro after the Riksbank’s decision, but fell back to unchanged at 1330 GMT.

All but one analyst in a Reuters poll had forecast a rate increase.

Deputy governors Per Jansson and Anna Breman – the latter in her first rate-setting meeting – entered reservations against the decision. Both wanted the central bank to wait before raising.

Riksbank governor Stefan Ingves said negative rates had done their job.
Riksbank governor Stefan Ingves said negative rates had done their job.Credit:Bloomberg

The central bank repeated that it expected the repo rate would remain unchanged through 2021.

Less than zero, again?

The world’s oldest central bank cut rates to -0.10 per cent in 2015, worried that the euro zone crisis would hit already weak prices and lead to a Japanese-style deflationary spiral.

It was forced to go further, with rates dipping as low as -0.50 per cent in 2016, before ultra-loose policy began to bite. The economy has grown strongly and inflation has bounced back.

Few would argue that raising rates now makes policy too tight.

“I’m not too concerned today because rates are still so low that a small increase isn’t worrying,” said Justus Jondal, a 50- year-old recruitment consultant and homeowner. “When I was growing up, interest rates were much higher.”

But many question the timing of the increase – only the second since mid-2011 – as the economy is slowing.

Inflation is below target and not expected to be stable around 2 per cent for years. Industrial activity is at its lowest since 2012 and business confidence is falling.

The move also puts the Riksbank at odds with other major central banks.

Norway’s central bank left its benchmark rate unchanged at 1.50 per cent on Thursday. The Bank of England’s rate remained 0.75 per cent.

While the Riksbank has been keen to exit negative policy, it could still be forced into a U-turn if Brexit or the ongoing trade conflict between the United States and China turns nasty and inflation dives again.

“Zero isn’t a floor for interest rates. It is the rate that is the most appropriate at the moment,” Ingves told reporters.

“If we need to, we can have periods … with negative rates, but that’s a hypothetical question and not anything we see ahead of us given our view of the development of the economy.”


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Source: Thanks smh.com