Sweden’s central bank ended its five-year experiment with negative rates amid growing concern about the implications for the economy, businesses and investors from sub-zero monetary policy.
The Riksbank raised its main repo rate on Thursday by a quarter percentage point to zero, a level it was last at in February 2015.
The Swedish central bank indicated that interest rates would remain at zero for years to come and added that it could be forced to cut them again if the economy worsens.
The world’s oldest central bank has been under heavy scrutiny for its monetary policy ever since the 2008 global financial crisis. 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 minus 0.5 per cent, which was in place for almost three years from 2016 until the start of this year.
The Riksbank on Thursday repeated its warning from October that if negative rates continued for too long “the behaviour of economic agents may change and negative effects may arise”.
Its proposed rise to zero had already been criticised by economists and companies, who questioned the wisdom of tightening monetary policy as the Swedish economy weakens.
The Swedish central bank had kept rates below zero for so long in an attempt to reach its inflation target of 2 per cent after years of coming close to disinflation.
It addressed the potential criticism of its rate increase head-on in its latest monetary policy report. “That the repo rate is being raised from the very lowest levels when the economy is weakening from a strong level does not mean that the inflation target is in jeopardy,” it said.
The Riksbank added that monetary policy would remain “expansionary” with the current real repo rate, adjusted for inflation, close to minus 2 per cent for the next two years and beyond. The real repo rate was last positive in 2012 in Sweden.
The central bank added that it was reasonable to expect the repo rate to be higher than zero but that low rates abroad — an implied reference to the European Central Bank — and economic uncertainty in Sweden and elsewhere made “it difficult to say at present when it will be appropriate to raise the rate next time”.
The decision to raise interest rates was not unanimous with two of the six board members entering reservations and preferring any hike to come later.
David Oxley, senior Europe economist at Capital Economics, said that the opposition of two deputy governors was a sign of how entrenched divisions inside the Riksbank had become and laid the way to a potential cut in 2020.
“The upshot is that the hawkish contingent will not have it all their own way and will face opposition if the economy stays sluggish next year, as we expect. All told while investors’ expectations are broadly in line with the Riksbank’s forecast that today’s hike will be ‘one and done’, we think that a reversal next year is on the table,” he added.