As central banks around the world are experimenting with subzero borrowing costs, Riksbank is worried that negative rates are damaging the economy. Sweden's central bank, ended five years of negative interest rates on Thursday (Dec. 19), bringing relief to its finance industry, saying inflation has been close to the target of 2 percent since the start of 2017 while the economic prospects and outlook for inflation are largely unchanged.
"The Riksbank assesses that conditions are good for inflation to remain close to the target going forward," the world’s oldest central bank said in a statement. "The forecast for the repo rate is unchanged, and the repo rate is expected to remain at zero percent in the coming years."
The Riksbank, which has come under fire for weakening the krona, said the decision on the repo rate will apply from 8 January 2020. The repo rate has been the Riksbank's policy rate since 1994 and is the rate at which commercial banks can borrow or deposit money at the Swedish central bank.
The move to hike its key interest rate back to 0% from minus 0.25% makes the Riksbank the first of the central banks that pushed rates below zero to come back up amid growing concerns that harmful side effects are outweighing the benefits of such policies as savers, banks and pension funds have been under pressure. Critics also warn that negative monetary policy can distort financial markets.
"It has become pretty clear over recent meetings that policymakers have become warier about negative rates becoming a more permanent state of affairs, and the effect that might have on people's expectations," ING economists told clients in response to the Riksbank Thursday decision.
Sweden's central bank cut rates to minus 0.10% in 2015, to head off the threat of Japanese-style deflationary spiral in the wake of the euro zone crisis. It went further, with rates dipping as low as minus 0.50% in 2016 hoping that the strategy would improve the Nordic nation's economic prospects.
The Riksbank’s Executive Board seemed divided on Thursday. Deputy governors Per Jansson and newcomer Anna Breman preferred to wait to raise the rate. Apart from the Riksbank, central banks don't seem to agree that now is the time to quit negative rates.
Rates in the eurozone, Denmark, Switzerland and Hungary are still sub-zero. With the exception of Hungary, they are expected to remain so for some time to come.
(Riksbank in Sweden, the world's oldest central bank)
Meanwhile, the Bank of Japan (BoJ) kept interest rates on hold Thursday. In its statement, the BoJ said:
“Japan’s economy is likely to continue on a moderate expanding trend, as the impact of the slowdown in overseas economies on domestic demand is expected to be limited, although the economy is likely to continue to be affected by the slowdown for the time being.”
The Bank of England also held its main interest rate steady at 0.75% on Thursday with its rate-setting committee voting 7-2 in favour of keeping the current level, forecasting that the economy would pick up in the coming period on the back of reduced Brexit-related uncertainties
“We see the Riksbank leaving its repo rate unchanged next year and also in 2021, in line with its rate path. Even though the threshold is probably higher than normal, the bank may well be forced to introduce stimulus measures once again. The reason is that we think inflation will be a worry to the bank in 2020” Nordea wrote on Dec. 12.
Interest rate in Sweden averaged 3% from 1994 until 2019, reaching an all time high of 8.91 percent in July of 1995 and a record low of minus 0.50% in February of 2016, according to Trading Economics.
Hopefully, other central banks around the world will now follow in the footsteps of Riksbank, ditching what was supposed to be a radical and short-lived measure, as the side-effects of negative rates are worse than the issues they were trying to resolve with negative rates.