Sweden - A Sign of Things to Come?

Eran Peleg, CIO December 23, 2019

Sweden, one of the first countries to experiment with negative interest rates, just became the first to abandon this controversial policy. Last week, Riksbank, the country’s central bank, announced that as of January, its key policy rate will increase to zero from (-0.25%). The key rate has been negative since 2015. Already back in 2009, the Bank started charging commercial banks to hold deposits with it, rather than pay them interest.

It is difficult to fully justify the policy move based on the macro-economic situation alone. The economy is not strong, and inflation is still hovering below the central bank’s inflation target of 2%.

So what is driving it? Possibly, public discontent and policymakers’ concerns over its potential side-effects. The general public has never been a fan of negative rates. To many, they seem counterintuitive and unfair. And among economists, it has always been controversial – with some concerned over the distorting effects that negative rates could have on the behavior of economic agents, companies and individuals.

Sweden has been one of five central banks with negative interest rates – including the prominent Bank of Japan and European Central Bank. No more. What does this move imply for the others?