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Sweden holds on to record low interest rate

Sweden's national bank (the Riksbank) has announced that the nation's record low key interest rate will remain unchanged at -0.35 percent.

Published: 28 October 2015 09:54 CET

Sweden holds on to record low interest rate

Swedish kronor. Photo: Fredrik Sandberg/TT

The Riksbank has also said it is expanding the country's bond-buying programme, with a further 65 billion kronor ($766 million) spent on the project.

The Nordic nation first slashed its interest rate – the repo – below zero in February in a landmark decision. It's national bank continued to cut rates in subsequent months, with the -0.35 rate introduced in July.

The Riksbank is hoping that its financial strategy will boost inflation in order to raise the price of everyday goods and services in Sweden which have been stagnant for two years. It has argued that this in turn will improve the country's economic prospects.

In a statement following Wednesday's announcement, the bank said that “economic activity is strengthening and inflation is showing a clear upward trend”.

The bank said that inflation was still on course to be close to two percent in 2016.

However it explained that it was keeping rates low due to “considerable uncertainty regarding the strength of the global economy”.

“Compared with previous forecasts, inflation abroad is deemed to be slightly lower and many central banks are expected to pursue an expansionary monetary policy for a longer time,” the text continued.

The basic idea behind negative rates is to stop organisations or people from making risky investments or transactions that could impact on the wider economy.

However Wednesday's decision to hold the repo at -0.35 is bad news for savers in Sweden who will continue to see no return on any nest eggs stashed in basic savings accounts.

But those wishing to borrow money to buy properties or shares will continue to benefit from the record low rates.

Sweden's bond buying programme is a version of quantitive easing, which in simple terms involves borrowing money to inject back into the economy.

The Riksbank said that the additional bond purchases announced on Wednesday would bring the total figure bought to 200 billion kronor by the end of 2016.

The krona was stable after the announcement but the Swedish market continued to fall, having previously experienced jitters following a forecast from the National Debt Office.

How is Denmark's economy handling inflation and rate rises?

The council, led by four university economics professors commonly referred to as “the wise men” or vismænd in Denmark, gave a much rosier picture of Denmark’s economy in its spring report, published on Tuesday, than it did in its autumn report last year.

“We, like many others, are surprised by how employment continues to rise despite inflation and higher interest rates,” the chair or ‘chief wise man’, Carl-Johan Dalgaard, said in a press release.

“A significant drop in energy prices and a very positive development in exports mean that things have gone better than feared, and as it looks now, the slowdown will therefore be more subdued than we estimated in the autumn.”

In the English summary of its report, the council noted that in the autumn, market expectations were that energy prices would remain at a high level, with “a real concern for energy supply shortages in the winter of 2022/23”.

That the slowdown has been more subdued, it continued was largely due to a significant drop in energy prices compared to the levels seen in late summer 2022, and compared to the market expectations for 2023.

The council now expects Denmark’s GDP growth to slow to 1 percent in 2023 rather than for the economy to shrink by 0.2 percent, as it predicted in the autumn.

In 2024, it expects the growth rate to remain the same as in 2003, with another year of 1 percent GDP growth. In its autumn report it expected weaker growth of 0.6 percent in 2024.

What is the outlook for employment?

In the autumn, the expert group estimated that employment in Denmark would decrease by 100,000 people towards the end of the 2023, with employment in 2024 about 1 percent below the estimated structural level.

Now, instead, it expects employment will fall by just 50,000 people by 2025.

What does the expert group’s outlook mean for interest rates and government spending?

Denmark’s finance minister Nikolai Wammen came in for some gentle criticism, with the experts judging that “the 2023 Finance Act, which was adopted in May, should have been tighter”. The current government’s fiscal policy, it concludes “has not contributed to countering domestic inflationary pressures”.

The experts expect inflation to stay above 2 percent in 2023 and 2024 and not to fall below 2 percent until 2025.

If the government decides to follow the council’s advice, the budget in 2024 will have to be at least as tight, if not tighter than that of 2023.

“Fiscal policy in 2024 should not contribute to increasing demand pressure, rather the opposite,” they write.

The council also questioned the evidence justifying abolishing the Great Prayer Day holiday, which Denmark’s government has claimed will permanently increase the labour supply by 8,500 full time workers.

“The council assumes that the abolition of Great Prayer Day will have a short-term positive effect on the labour supply, while there is no evidence of a long-term effect.”

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