Last week, Sweden’s central bank, the Riksbank, has decided to cut its key interest rate from 0% to -0.1% in response to sluggish economic growth and negative inflationary rates over the past year. In accordance with the intention of this policy, the Riksbank has also simultaneously launched a quantitative easing program by buying 10 billion krona, or $1.2 billion, worth of government bonds to forcefully kick start the economy. However, while these moves may sound extraordinary, the reality is, they are nothing new.
Earlier this June, the European Central Bank, or ECB, has also cut a key interest rate below zero in response to a decreasing spending trend, which has led to lower prices. It hoped that it could save the Euro from deflating by inspiring more borrowing and spending. In response to this, many European nations, such as Denmark, Switzerland, and now Sweden, are doing the same thing in order to achieve similar outcomes. The Riksbank feels that this shift will allow the Swedish economy to approach its targeted 2% inflation. Should this change fall short of achieving its goals, the Riksbank chief, Stefan Ingves, has promised to cut rates even further.
Despite the existing optimism behind this new financial policy, many are skeptical about the implications it brings. For one, Annika Winstch, chief economist at Nordea Bank, feels that Sweden’s recent actions brings about a sense of panic amongst investors and may paint the wrong picture that the Swedish economy is in dire stress. On the other hand, the Swedish central bank believes that a combination of a lower interest rate, cheaper oil price due to excess global production, and weaker krona as a result of its new policy will help the economy push forward and achieve its targeted growth.
Personally, I feel that at the very least, the macroeconomic theory behind this new policy makes sense. With a negative interest rate, banks will be forced to lend out money as quickly as possible to avoid losses. In return, the borrowed funds will hopefully find their way into the economic cycle, which, from a higher volume of capital, will drive up inflation rates and stimulate economic growth. However, this does run into the risk of banks lending to sub-prime borrowers, which may or may not cause something similar to the US housing market crash. Whatever may happen, only the long term result will reflect the merit of this change.