Negative Interest Rate-Sweden

NEGATIVE INTEREST RATE-SWEDEN

When an economy is struggling, it is standard practice for a central bank to cut interest rates. It can make saving less attractive and borrowing more, which boosts the money being spent. A article in The Telegraph “How Sweden’s negative interest rates experiment has turned economics on its head” (http://www.telegraph.co.uk/finance/economics/11895084/How-Swedens-negative-interest-rates-experiment-has-turned-economics-on-its-head.html) discuss the Sweden’s practice with negative rates and the influence it brought. From September 2008 to October 2014, the Repo rate decreased from 4.75% to 0% according to the Riksbank (Central bank of Sweden), reaching the rates’ floor. Central bank policymaker had believed they had run out of room to support their respective economies (which means they cannot reduce the interest rates anymore). But something should not happen has happened and is happening now. From February 2015 to December 2015, the interest rates reduce from -0.1% to -0.35% according to Riksbank. Unemployment is unusually hight for an advanced economy at more than 7pc. From the chart we can see that, even the unemployment is still about its pre-crisis levels (6pc), there is a trend of decrease after 2014 from 8.08% in October 2014 to 7.26% in July 2015. And as the Riksbank cut its own rates to avoid deep deflation, Swedish inflation is well below target, especially from 2012 to August 2015( the target inflation is 2pc). Many economists think that Sweden’s flexible approach to money is efficient and many City analysts believe that the Riksbank will continue cutting, reducing its key interest rate.