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Matthew Yglesias Makes a Good Catch: Monetary Policy Department


Yglesias » Unorthodox Monetary Policy Worked Nicely In Sweden; Will Anyone Notice?: Way back on August 27, 2009 the FT reported: “Bankers Watch as Sweden Goes Negative”. At issue was Sweden’s embrace of unorthodox monetary policy, specifically their decision to cut the interest rate paid on bank reserves below zero. In other words, they were charging a penalty. In the USA, by contrast, the Federal Reserve actually raised the interest rate paid on reserves.

Yesterday, the FT reported: “Sweden records fastest quarterly growth”. That’s the fastest growth Sweden has ever recorded. Ever. They’ve already tightened monetary policy from where it was in the depths of the crisis and, naturally, are poised to do some additional tightening. So are bankers actually watching this? It seems to me they’re not. When Sweden did something unorthodox, people said the world’s central bankers were going to watch. It worked. It worked really really well.

Here is the new story: Andrew Ward:

FT.com / Global Economy - Sweden records fastest quarterly growth: Sweden registered its fastest quarterly economic growth on record in the last three months of last year, burnishing its status as Europe’s best-performing economy. The forecast-beating 7.3 per cent year-on-year expansion looked sure to increase pressure on the country’s central bank to raise interest rates further amid concern over possible overheating. The Riksbank has already increased rates five times since last July, when Sweden became the first European Union member to tighten monetary policy since the start of the global financial crisis.

Scandinavia’s biggest economy has surged back from a deep recession in 2009 as manufacturers such as Volvo, the truckmaker, and SKF, the world’s biggest maker of ball bearings, benefit from rebounding global demand. Domestic consumption has also recovered strongly, helped by robust public finances which have allowed Sweden to avoid the fiscal austerity measures holding back growth in other parts of Europe...

Here is the old story: Andrew Ward and David Oakley:

FT.com / Currencies - Bankers watch as Sweden goes negative: For a world first, the announcement came with remarkably little fanfare. But last month, the Swedish Riksbank entered uncharted territory when it became the world’s first central bank to introduce negative interest rates on bank deposits.... Mervyn King, the Bank of England governor, has hinted he may follow the Swedish example as the danger of a so-called liquidity trap, where cash remains stuck in the banking system and does not filter out to the wider economy, is an increasing concern for the UK....

Sweden’s decision to introduce negative interest rates on deposits at the Riksbank means that commercial banks have to pay for the privilege of saving their money at the central bank, writes David Oakley. The new rate of minus 0.25 per cent forces banks to pay 0.25 per cent to the Riksbank. Normally, banks would be paid interest on these deposits.

It is thought to be the first time that negative rates have been introduced. Central banks usually shy away from such a drastic policy because it is in effect a tax or fine on the commercial banks and could hurt their balance sheets. However, the Riksbank hopes that by charging banks for saving their money, rather than paying them, it will encourage them to increase their lending to individuals and businesses, boosting the economy. It also hopes that it might encourage them to divert the money into other assets, such as government bonds or even highly rated corporate bonds. This would bring down bond yields and act as an stimulant.... At the Riksbank, which now has a deposit rate of minus 0.25 per cent, the most vocal advocate of the policy is deputy governor Lars Svensson, a world-renowned expert on monetary policy theory and a close associate of Ben Bernanke, chairman of the US Federal Reserve, since they worked together at Princeton University.

According to the minutes of the Riksbank’s July meeting, Mr Svensson dismissed the “zero interest rate mystique” that had “exaggerated the problems” associated with zero or sub-zero rates. “There is nothing strange about negative interest rates,” he said. Henrik Mitelman, chief fixed income strategist at SEB, the Swedish bank, said that the negative deposit rate, combined with a cut in the repo rate to an historic low of 0.25 per cent, sent a powerful signal to the market that the Riksbank intended to keep rates close to zero until economic recovery was well under way. “What the Riksbank did was very brave. They decided to see if markets could cope with it and the markets have.”...