Sweden’s negative interest rate experiment ends
World’s oldest central bank ends hikes key rate back to zero amid growing concerns harmful side effects outweigh benefits
The world’s oldest central bank has ended its five-year experiment with negative interest rates amid growing concern its harmful side effects could outweigh the potential benefits.
Sweden’s Riksbank “has been under heavy scrutiny for its monetary policy ever since the 2008 global financial crisis”, says the Financial Times. It raised rates in 2010 and 2011 leading to accusations of “sadomonetarism” from Nobel laureate Paul Krugman, before consistently cutting rates down to a record low of -0.5% in 2016.
On Thursday it became the first of the central banks that pushed rates below zero in response to the post-financial crisis global slowdown to inch its way back to what was long considered the floor for interest rates.
CNN says this marks the next step in an “unprecedented experiment” by central bankers. To boost a sluggish global economic recovery, between 2014 and 2016 central banks in Europe and Japan pushed interest rates to their lowest points in history.
Riksbank Governor Stefan Ingves said negative rates had worked well, boosting inflation and the economy “but fears about the adverse impact of these policies have been building” says CNN.
“It’s been painful for banks, which have to pay to park their money with central banks instead of collecting interest. Savers have also been penalised, and it's added to pressure on pension funds,” it adds.
Reuters reports that negative rates have boosted real estate prices, households and corporations have taken on more and more debt, “threatening a financial meltdown if there is an unexpected shock”.
Cheap loans have also kept alive “zombie” firms, which otherwise would have gone to the wall, reducing overall productivity in the economy, while “some critics doubt negative rates should be used at all, arguing they have failed to push up inflation in the euro zone or Japan sustainably and that they create more problems than they solve”, says Reuters.
However, Bloomberg says “misguided anxiety about subzero rates has led to unnecessary tightening” and that other banks should “take heed” from the lessons of Sweden’s recent rate hike.
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