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Sweden dives deeper into negative territory

Posted on February 12, 2015

The headquarters of the Riksbank, Sweden's central bank, stand in Stockholm, Sweden, on Thursday, Nov. 29, 2012. Sweden's Riksbank is unlikely to back proposals for a cap on banks' foreign borrowing even after the government and regulator warned that the industry is too reliant on international funding markets. Photographer: Casper Hedberg/Bloomberg©Bloomberg

In global currency wars, one of the smaller players has just fired a very big weapon.

Sweden’s Riksbank on Thursday became the first central bank to move its main repo rate into negative territory — by 10 basis points to -0.1 per cent — and launch quantitative easing.

The move followed four rate cuts in 18 days from the Danish central bank, which has cut its deposit rate – levied on money parked at the central bank – to a record low of -0.75 per cent. The actions of Sweden’s central bank are raising wider questions about what appears to be a worldwide race to the bottom for interest rates.

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The Swedish and Danish rate cuts come just weeks ahead of the start of the European Central Bank’s QE programme and weeks after the Swiss abandoned the defence of their currency.

Gary Jenkins, chief credit strategist at hedge fund LNG Capital, said the Swedish and Danish moves highlighted the difficulty for small, independent central banks in resisting pressure from the likes of the ECB, US Federal Reserve and Bank of England.

    “It’s almost like a tidal wave. Even though you have got a firm hold, there is a huge amount washing over you. Yes, they are independent. Yes, they can do what they want. But the truth is that in this very co-ordinated macro world that we live in it is very difficult to be properly independent,” he said.

    The scale of the Riksbank’s actions surprised the markets, with the Swedish krona falling to a six-year low against the dollar.

    The Swedish central bank was the first to raise rates after the global financial crisis, to 2 per cent in 2011. But inflation soon began to slide – headline rates have been negative for most of the past two years in Sweden – leading to heavy criticism from the likes of Paul Krugman, the economist, and a reversal of the rate rises.

    Now the Riksbank has taken a leap into the unknown with its rate cut and said they could fall further, depending on the reaction from banks and the public. Some economists worry that people could start hoarding cash if rates remain negative.

    The Riksbank also announced the purchase of a modest SKr10bn in government bonds but said it was ready to “act quickly where necessary” even between normal monetary policy meetings.

    Reaction was mixed. Mikael Sarwe, head of strategy in Sweden for bank Nordea, said: “This smells like a central bank that is panicking. It is very hard to understand [their actions] when you look at the economy with GDP at 2 per cent, employment rising by 1.5-2 per cent, house prices rising by 15 per cent, credit growth booming; all this says that you should not stimulate the economy any more.”

    Janet Henry, European economist at HSBC, said the Swedish and Danish central banks had made a “pre-emptive strike” ahead of the ECB’s QE launch in March.

    “These are very small players on the global stage and that is why we are seeing action sooner rather than later,” she said.

    The Riksbank said there were signs the drop in inflation had bottomed out and consumer prices would rise gradually. But it appeared worried that low inflation expectations could become entrenched, a potential problem for forthcoming wage negotiations.

    Mr Sarwe said the Riksbank’s move could have the opposite effect. “In doing this, they might be pushing inflation expectations down even more because they are signalling to the population ‘we have a huge inflation/deflation problem’.”

    Economists expect the Swedish cut to put further pressure on neighbouring central banks to do likewise. Norway is likely to cut rates next month despite fears of a housing bubble and it being one of the few countries to have inflation close to its target.

    Oystein Olsen, Norges Bank governor, said: “We are a small, open economy. Our monetary policy is affected by what is happening abroad. To explain why Norwegian rates have been so low for such a long time, the short answer is that rates internationally are so low.”