The Riksbank, in attempt to meet inflation rate targets, has pushed interest rates further into the negative
The world’s oldest central bank, Sweden’s Riksbank, has further cut its interest rates into the negative. In a bid to try and raise inflation, the central bank reduced its repo rate to -0.5 percent, from its previous -0.35 percent. The Riksbank said in a statement that although the Swedish economy was strengthening, “inflation is expected to be lower during 2016 than previously forecast.” The bank said that despite its expansionary monetary policy helping to boost underlying inflation, along with an uptick in the economy, since 2014, it was not yet on a firm footing. It is hoped that this new rate will help the Swedish economy achieve the bank’s target of two percent inflation by 2017.
The bank also noted that it was not alone in loosening of monetary policy, citing this as another reason for the rate cut. It was noted in the statement that Sweden must take into account the expansionary monetary policy of other European central banks, or else “the krona exchange rate is at risk of strengthening at a faster rate than in the forecast, which would make it harder to push up inflation and stabilise it around 2 per cent.”
Defying convention, an increasing number of central banks within Europe are delving into negative rate territory. Denmark and Switzerland both have negative interest rates, while the ECB’s deposit rate is also below zero. This has presented a number of problems for European banks. Most banks have been reluctant to pass on negative rates to depositors, for fear of provoking them to withdraw their funds in favour of other banks or even opting for hoarding physical cash. However, this has meant that banks have had to allow negative rates to eat into their margins. Further, profits are also hit by low returns from central bank rate linked mortgages.
Earlier in 2016, the Riskbank also gave its governor increased powers. These powers allow him to unilaterally intervene in forex markets to depreciate the Kroner, in the case of an appreciation threatening the country’s inflation targets.