The Swedish central bank cut its negative interest rates even further last night, from -0.35% to -0.50%, as it attempts to stop its currency appreciating and damaging its export economy. It is another shot in the global currency war where countries are seeking to protect their interests against a background of ultra-loose monetary policies around the world. Sweden still operates its own currency, the krona, and has made the move in advance of anticipated further stimulus from the ECB that would serve to strengthen the krona against the euro. In a statement, the Riksbank said “Uncertainty regarding global developments is still high, with low inflation and several central banks pursuing more expansionary monetary policy Swedish monetary policy must relate to this. Otherwise the krona exchange rate is at risk of strengthening at a faster rate than in the forecast, which would make it harder to push up inflation and stabilize it around 2.00%.”
The bank also said that it could go even further below zero if necessary and has added to the debate amongst economists and academics about the experimental policies of negative interest rates. Until recently, negative interest rates were an academic discussion that could hardly be conceived operating in real world economies. Now the debate is about whether they are an effective tool or how far negative can rates actually go before countries turn in to cash economies to negate the effect of a ‘tax’ on bank deposits.
A research note by JP Morgan has concluded that the bounds of negative interest rates are much further than previously thought. “Our analysis suggests that the use of these schemes could allow for considerably lower policy rates without undue pressure on bank profitability or creating a powerful incentive to move into cash,” the bank said. “Calibrations based on Swiss experience suggest that with modest changes to the reserve regime, the policy rate in the Euro area could, in principle, go as low as -4.50%”.