Sweden goes negative

As you were drinking your morning coffee I’m sure you were filled with the same sense of excitement as I was—Sweden has adopted negative interest rates on reserves!  Well, sort of.  (HT — Malavel)

Here is the story from Forbes:

STOCKHOLM, July 2 (Reuters) – Sweden’s Riksbank cut interest rates to a fresh record low on Thursday and offered 100 billion crowns ($13.2 billion) of loans to banks to foster lending as it pulled out the stops to reverse its worst recession since the 1940s.

The central bank lowered its key interest rate by 25 basis points to 0.25 percent in a surprise move, putting official rates their lowest since records began in 1907, and said it expected rates to remain at that level until late 2010.

‘It’s a double whammy, or even a triple whammy,’ said Roger Josefsson at Danske Markets.

‘The deposit rates are actually negative now. In some sense they are creating a money machine for banks. You can lend all you want, but don’t put that back into the central bank.’

Nearly all economists in a Reuters poll had expected the Riksbank to keep rates on hold at 0.5 percent, in line with a previous central bank forecast that suggested rates would stay around that level at least until early next year.

Malavel told me that the deposit rate at the Riksbank was cut to negative 0.25%, but I haven’t been able to confirm that.  Here is another interesting tidbit from Bloomberg:

The krona fell against the euro, weakening 1 percent to 10.8288 per euro as of 10:07 a.m. in Stockholm. The Swedish currency depreciated 1.3 percent against the dollar.

“The rate cut is one additional aggressive step to give the economy an extra boost and the loans to the banks are a way to put more force behind their words and to try to get longer- term interest rates lower,” said SEB SA analyst Elisabet Kopelman.

The repo rate can’t “in practice” be cut further, Riksbank Deputy Governor Barbro Wickman-Parak said at a news conference.

‘The Limit’

“Our view is that this is the limit under which we can’t go further down,” she said, acknowledging that her colleague Lars E.O. Svensson entered a reservation and wanted to cut the rate to zero. The minutes from the policy meeting will be published on July 16.

Wickman-Parak said the Riksbank may offer further loans to the country’s banks if the economic crisis worsens.

Yes, the Lars E.O. Svensson is the very same professor at Princeton that I often cite in this blog.  He and I both favor targeting the forecast.  Apparently he moonlights as a Swedish central banker.  I’m glad he favored an even more expansionary monetary policy than his colleagues.  Great minds think alike!

Now I should offer a number of caveats here, as I don’t know much about the details:

1.   The biggest problem may be vault cash.  There is no indication that is covered.  Perhaps the Riksbanks has some way of dealing with that issue.  I believe Sweden has only a few banks, and I am guessing that the Riksbank could easily prevent a build up of vault cash if they wished to.

2.  There is no indication that the Riksbank intends aggressive QE, as the 13.2 billion is being “offered” to banks, not forced down their throats as I’d prefer.

3.  I’m not sure QE is needed in a country like Sweden in any case; they can always boost AD as much as they wish through currency depreciation.

4.  The krona only depreciated by about 1%.  This is not a foolproof indicator, but it suggests to me that the markets saw it as merely a modest step.

I actually think a negative rate on reserves could do even more good in the US.  We have something closer to a closed economy model, by which I mean that for all sorts of political reasons the Fed probably does not view currency depreciation as a viable policy instrument.  In that case we need domestic reflation.  In addition, there are already massive excess reserves in the US, so with a negative rate on reserves we could expect banks to engage in large purchases of assets with those reserves.  Even if they just bought T-bonds, it would slightly lower yields, and also push more money out into circulation.

I know the Riksbank’s move is just a tiny step, but so far as I know this is the first time any real world central bank has adopted the proposal we have been discussing on this blog.  (At least recently, I recall that Switzerland once tried this idea.)  And Lars Svensson is on the cutting edge of macro, if he was behind this decision it bodes well for the future acceptability of the negative interest on reserves concept.



17 Responses to “Sweden goes negative”

  1. Gravatar of malavel malavel
    2. July 2009 at 08:34

    Here’s the press release in english from Riksbanken: http://www.riksbank.com/templates/Page.aspx?id=32047

    “The deposit rate is at the same time cut to -0.25 per cent and the lending rate to 0.75 per cent.”

    Just half a sentence for the penalty rate, so perhaps this is something completely different.

  2. Gravatar of azmyth azmyth
    2. July 2009 at 10:34

    I don’t think that vault cash will be a big problem, although it may still be the “biggest problem”. As individuals, we can substitute account balances for cash, but as a society, there is only so much hard currency out there. I don’t know what percentage of M1 is cash in Sweden, but I doubt it’s significant. Banks may actually start paying more than face value for currency, which would be interesting.

  3. Gravatar of James James
    2. July 2009 at 12:47

    Dear Dr. Sumner, please proofread the Excess Reserves article on Wikipedia when you get a few minutes. Thanks!

  4. Gravatar of anon anon
    2. July 2009 at 15:41

    Are you quite sure of your facts here?

  5. Gravatar of anon anon
    2. July 2009 at 15:48

    Sorry. You’re right!

    Here it is – last paragraph:


  6. Gravatar of ssumner ssumner
    2. July 2009 at 17:49

    malavel, Thanks again for that tip. Given the importance of the idea to this blog, I’m really glad you told me about it. I think others will also be interested. Today Sweden, tomorrow the world! (BTW, I could get the link to open, but I’ll try again. But anon also found a Riksbank report.)

    azmyth, I just don’t know much about Sweden. All I know is that if they set their mind to it, the Riksbank can take steps to prevent vault cash from being a problem. The only other potential issue is currency hoarding by the public, but I don’t see that as a big issue if the central bank is prepared to undertake an assertive QE, not a wimpy one like ours.

    James, I read it, but what do you mean by “proofread?” Do you want me to point out errors? It looks reasonable, but there may be a few small errors. I have doubts about the $2 billion cost estimate, for instance. Without interest, ER holdings would be smaller, thus the Fed would earn less interest on its assets.

    anon, Thanks, it was great finally seeing the -0.25% in writing. It would be really weird if they got the idea from this blog. Not directly of course, I’m sure nobody at the Riksbank reads The Money Illusion. But the idea was mentioned in both Mankiw’s blog and the Hall and Woodward blog after I emailed it to each of them. And those guys are pretty influential.

  7. Gravatar of Current Current
    3. July 2009 at 00:26

    I think you folks are taking your enthusiasm for money issue a little too far. Negative interest rates sounds like a bit of a loopy idea to me.

  8. Gravatar of ssumner ssumner
    4. July 2009 at 07:25

    Current, That’s what they said when I proposed it. Lot’s of commenters said I didn’t understand real world central banking, and that my idea was too far-fetched to be implemented. Well the Riksbank is a respected central bank, despite Sweden’s relatively small size.

  9. Gravatar of TGGP TGGP
    4. July 2009 at 10:16

    You likely saw it linked at Marginal Revolution, but in case you missed it “Mish” Shedlock complains about Sweden’s negative rates here.

  10. Gravatar of anon anon
    4. July 2009 at 14:57

    Sorry, wrong post previously.

    Here’s a quote from somewhere; source and accuracy unknown.

    “It seems a nothingburger to me because the Riksbank hasn’t implemented QE yet. The reserves in the Swedish banking system should be balanced, and looking at the latest Riksbank balance sheet, on 23 June they only had SEK 43 million outstanding on their overnight deposit facility. In other words, no bank is going to be paying this negative rate in reality. If Sweden were to go down the QE route, the deposit and lending rates would likely be sidelined and the Riksbank would pay a zero or positive interest rate on all reserves, just as the Fed and the BoE are doing now. No-one really knows what would happen if a banking system with hugely excessive reserves had a negative interest rate imposed on those reserves, but it’s easy to imagine scenarios where you reach extremely high inflation very quickly as banks play pass-the-parcel with reserves. Monetary velocity could quickly get out of control.”

  11. Gravatar of ssumner ssumner
    5. July 2009 at 06:54

    TGGP, Thanks.

    anon, I answered it on the other post.

  12. Gravatar of Alex Golubev Alex Golubev
    6. July 2009 at 08:17

    What’s the reply to “flight of capital FROM sweden” (TGGP’s Mish post)? Seems like a solid economic argument to me. Those damn savers. who are they trying to outsmart! spend spend spend, losers!

  13. Gravatar of ssumner ssumner
    6. July 2009 at 15:04

    Alex, Mish’s argument seems solid? I hope you are kidding.

    I never worry about a “flight of capital,” I worry about sound economic policies. Capital flows towards countries with sound economic policies. If Sweden thinks they need faster NGDP growth, go for it, and don’t worry about a flight of capital.

    BTW, the use of the term “spend” is very inconsistent, some people mean AD, some mean consume. But those are two utterly different concepts. When I say I want more “spending,” I do not mean I want less saving, which seemed to be the implication of your comment.

  14. Gravatar of TGGP TGGP
    6. July 2009 at 18:42

    Just last night I was listening to part of a talk Larry White gave where he discussed how the mercantilists worried about capital (in the form of specie) leaving the country, and the arguments Hume & Smith gave against them. He was talking about a free-banking system contrasted to one with central banking though.

  15. Gravatar of ssumner ssumner
    7. July 2009 at 05:27

    TGGP, Remember that cash is the modern equivalent of gold. And if cash leaves the country you can always print more. And if it comes back you can remove it from circulation.

  16. Gravatar of PRice PRice
    8. July 2009 at 14:19

    ..Which would leave prospective debtors – wince, slap forehead – with no-one to borrow from..

  17. Gravatar of TheMoneyIllusion » One economic lesson from Sweden TheMoneyIllusion » One economic lesson from Sweden
    7. July 2011 at 17:12

    […] Not to pat myself on the back, but . . . well, let’s be honest, this link is to pat myself on the back.  And this one too. […]

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