The Swedish central bank Riksbanken has just lowered the interest rate to zero (yes, zero) percent, which was reported at a press conference in Stockholm today. This is a response to a couple of months of deflation, and with it enormous pressure from both politicians and Keynesian know-it-alls to quickly and massively lower interest rates. Of course, the interest rate was already very low and at zero it can get no lower. In other words, we’ve reached the zero bound. Why? Depression phobia.
According to the Riksbanken, they do not expect to raise the interest rate until mid 2016. The decision means, according to media reports, that the central bank now “pays” a negative 0.75 % on banks’ funds held at Riksbanken.
The immediate effect in the financial and money markets was an expected fall of the krona’s (the Swedish currency) exchange rate. To the central banksters, journalists, and pundits this is great news, since this means a booming export sector, more expensive exports, and therefore price inflation to relieve the country from the horror of a possible deflation spiral.
I guess we’ll see. Sweden has a history of manipulating its currency, a standard “solution” in the 1970s and 1980s that led to the country suffering a depression in 1992. During the past two decades, there has been political consensus around cutting down expenditure through rolling back the welfare state, paying back public debt, and lowering taxes - partly to regain the lost confidence. Today’s decision by the Riksbanken is not an outright devaluation of the krona, the preferred measure of “old” Sweden, but has a similar effect.
Update: In an official statement, the Riksbanken notes that the Swedish economy is “relatively strong” and that the economic outlook is “improving,” but that inflation is “too low” (the central bank’s target is 2% price inflation). The only major potential problem is the public’s debt level, which is too high. (Especially mortgages, in a real estate market that is generally considered to be a bubble.) The debt level will not, of course, get lower with lower interest rates. For this reason, many “experts” expect a legal amortization requirement on mortgages in the near future to lower the public’s debt as well as “cool off” the real estate market.
Update 2: In the Q&A following the press conference, Riksbanken chairman Stefan Ingves makes it very clear that there are “no technical limitations” to lowering the interest rate (way) below zero. But this is not necessary at present and is not a measure included in the central bank’s prognosis. It is possible and may be a preferred course of action should the economic situation deteriorate, states Ingves.
