STOCKHOLM (Reuters) - Sweden’s central bank is expected to become the first in the world to claw its way out of negative interest rates on Thursday, as worries about the unwanted side-effects of such a policy trump signs of slower growth at home and a shaky global outlook.
The Riksbank cut rates below zero in early 2015 to head off the threat of Japanese-style deflation in the wake of the euro zone crisis.
The European Central Bank, Denmark and Switzerland had already gone sub-zero - the first central banks ever to experiment with such an extreme policy. Japan and Hungary have since joined the club.
On Thursday, if analysts are right, the Riksbank will hike its benchmark repo rate to zero from -0.25%, making it the first to return to more normal territory.
But with below-target inflation and a slowing economy - activity in the industrial sector at its lowest level since 2012 - many question why the Riksbank is in such a hurry.
“Exiting negative rates is the main reason,” said Torbjorn Isaksson, economist at Nordea. “It’s hard to see that inflation or growth would be too high if they did not hike. All the risks point in the other direction.”
On the face of it, negative rates - which hit -0.50% in 2016 - have worked well in Sweden. The economy has grown above trend rate for years, unemployment has dropped and inflation - which basically disappeared in 2014 - has bounced back to close to the Riksbank’s 2% target.
But the Riksbank is worried about the long-term effects.
In neighboring Denmark, where the certificate of deposit rate is -0.75%, banks have paid a heavy price for negative rates, around 4 billion Danish crowns ($590 million) since 2012 according to Nordea.
Savers have suffered at the expense of borrowers. In Denmark, banks are now charging for holding deposits of over 750,000 crowns, while some house buyers are being paid to take a mortgage.
In Sweden, house prices and borrowing have soared.
“Unfortunately, that represents a big and permanent risk to the Swedish economy,” Riksbank Governor Stefan Ingves said after the last rate meeting.
Ultra-cheap borrowing also means uncompetitive companies are being given a life-line, reducing economic efficiency, while low yields make it harder for pension funds and life insurance firms to meet their long-term commitments without taking on higher risks.
“It is good to bring an end to negative rates,” said Jonas Thulin, head of asset management at Erik Penser. “It is just the timing that is unfortunate.”
With the economic case for rate hikes even less convincing in other countries with negative rates, the Riksbank is unlikely to set a precedent. Denmark’s central bank Governor Lars Rohde, for example, said late in November the country could be sub-zero for another five to 10 years.
But a hike would add fuel to a global debate about whether the extreme monetary policy has really helped.
Years of extraordinary policy measures - including negative rates and bond purchases - have not pushed up inflation in the euro zone. Even in Sweden, much of the rise in inflation has been driven by a weak crown, which is seen as a temporary effect.
Many economists believe negative rates are the wrong tool for fixing economies beset by structural problems or for tackling more fundamental economic trends such as an aging population.
That means governments will have to take a bigger role in the longer term.
“We have to talk about fiscal policy. Monetary policy isn’t going to be able to solve this alone,” Magnus Billing, CEO of pension firm Alecta said at a panel debate on negative rates in October.
Given the parlous state of government finances in many countries in Europe and the debt ceiling imposed by the EU’s stability and growth pact, that will be difficult.
But if negative rates are not to become permanent, a new framework will have to be hammered out.
“We are not going back to the old days when the repo rate was 5%,” Riksbank Deputy Governor Per Jansson said at the panel debate at Alecta.
“The new normal is quite different from what the old normal was.”
GRAPHIC: Sweden economy: tmsnrt.rs/2bylYpf
GRAPHIC: Riksbank rate, inflation and the Krona: tmsnrt.rs/1qEN4Rz
GRAPHIC: The Scandinavian housing market interactive: tmsnrt.rs/2k1TfAt
Reporting by Simon Johnson; Editing by Hugh Lawson
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