Sweden joins growing group of countries with negative rates

AP News
Posted: Feb 12, 2015 11:43 AM
Sweden joins growing group of countries with negative rates

STOCKHOLM (AP) — Sweden joined a growing group of countries to cut its key interest rate to negative — a historical first for the Nordic nation that shows how authorities globally are resorting to new methods to nudge up inflation and growth.

The Swedish central bank on Thursday cut its repo rate to a record low of -0.1 percent from zero and launched a program of government bond purchases worth 10 billion kronor ($1.2 billion) to stimulate the economy.

It's the first time the bank, called Riksbank, has lowered below zero its key rate, which is what it charges commercial banks to borrow money.

The negative rate means banks will in fact be paid a tiny rate to take money from the Riksbank. The hope is that would encourage them to use the money to lend, supporting investment and growth.

The bank cited the risk that inflation, which it believes has now reached its lowest point, will not increase fast enough and that global growth will remain slow in coming years.

In Europe, Denmark and Switzerland have already lowered their key interest rates below zero. The European Central Bank has lowered a separate rate — what it charges banks to take deposits from them — to below zero.

The unusual moves show many central banks, which usually try to bolster the economy by lowering rates, are entering uncharted territory.

In Sweden, markets reacted strongly to Thursday's rate cut.

"I don't think it was a good decision," said Annika Winsth, chief economist at Nordea Bank. "Cutting the rate to negative and the bond purchases give the signal of being in a crisis, and Sweden's economy is not in crisis," she said.

While encouraging lending, the latest Swedish move is likely to hurt savers by reducing effective market interest rates further.

The krona fell sharply against foreign currencies after Thursday's move.

The central bank said it was prepared to do more to stimulate the economy if needed. "This will primarily entail making further (rate) cuts, postponing the first (rate) increase and increasing the purchases of government bonds," it said.