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Swedish Interest Rates Deeper Into Negative Territory

Swedish Interest Rates Deeper Into Negative TerritorySwedish Interest Rates Deeper Into Negative Territory

Sweden’s central bank has taken its main policy rate deeper into negative and uncharted territory, citing growing economic uncertainty and worries about Greece.

In the latest salvo in a global currency war, the Riksbank cut its main interest rate by 10 basis points to minus 0.35%.

Monetary policy has come under increasing scrutiny in recent years as the Riksbank tries to stop deflation taking hold in Sweden. The central bank cited worries that an unexpectedly strong Swedish krona could hamper efforts to boost inflation through a weaker currency, EU Economy reported.

The decision, unlike other recent ones, was not unanimous, with Henry Ohlsson, deputy governor, arguing that rates should have been held.

Some economists are concerned about the effects of such low interest rates on the economy, which the Riksbank expects to post gross domestic product growth of 2.9% this year. House prices and household debt have been increasing in Sweden—and in neighboring Denmark and Norway where rates are also at record lows—raising fears of a housing bubble.

The Riksbank said it expected to hold rates at minus 0.35% for more than a year and further cuts were possible. It also increased its small program of quantitative easing by saying it would buy another SKR 45 billion ($5 billion) of government bonds by the end of the year. The rate cut took markets by surprise, with most economists having forecast no change due to the strength of recent economic data. The euro rose 1% to SKR 9.348.

The cut is the latest act in the recent drama at the Riksbank. Its rate rises in 2010 and 2011 have been cited by Janet Yellen, chair of the US Federal Reserve, and her predecessor Ben Bernanke as examples of tightening monetary policy too early.

The Riksbank raised rates even though inflation was below its 2% target and since 2011 has been forced to cut repeatedly to keep deflation at bay.

 

Financialtribune.com