Negative Interest Rates in Sweden

August 28th, 2009 7:56 am | by John Jansen |

All of the quantitative ease in the world would prove futile in stimulating economic growth if banks hoard the new cash as excess reserves and do not lend it.

To encourage bank lending Sweden recently embarked on a program of negative interest rates whereby banks pay the central bank for holding money at the central bank.

There is an excellent  article in the FT on the topic and I thank reader AB for pointing it out.

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  1. 8 Responses to “Negative Interest Rates in Sweden”

  2. By frankl on Aug 28, 2009 | Reply

    i am not sure that this differs much from the usd bond repo fail rate being moved to minus3% (via the penalty programme run by the Fed) rather than the more conventional zero, in May2009

    nice eh?

  3. By John Jansen on Aug 28, 2009 | Reply

    Reader AB emailed me and pointed out an interesting paragraph at the bottom of the sidebar of the story:

    “In the UK, there have been signs that banks are switching cash into short- dated government bonds following hints from Mervyn King, Bank of England governor, that the policy could be introduced there.”

    That is probably the reason for the 2 year gilt touching a record low this week.

  4. By Bman on Aug 28, 2009 | Reply

    Couple things come to mind here. 1- If I can make more from Timmy and Ben, why would I loan-out to the private sector – especially when I can come back and say “you put us through the stress tests – we have to hold more”. 2- If there is no surge in demand, why all the pressure to increase lending?

  5. By Kevin Mackey on Aug 28, 2009 | Reply

    If this does gain widespread acceptance, that kills one of the tools Bernanke claims he would use to get money out of the system. How would he handle that PR campaign?

  6. By Johan on Aug 28, 2009 | Reply

    Banks as a whole cannot withdraw reserves from the central bank by lending. They can only pass reserves between their accounts at the CB.

    Even FT journalists seem to think that reserves disappear when banks “lend the money the CB has given them”. There is no such thing.

    Only if banks buy newly issued government paper reserves are moved to the Treasury’s account at the CB and total bank reserves decrease.

    The CB only creates liquidity for payments between banks.

  7. By jill on Aug 28, 2009 | Reply

    “Carl Milton, fixed income analyst at Danske Bank in Stockholm, cautions that the Riksbank decision was not as pioneering as some have portrayed. The Bank routinely keeps its deposit rate 50 basis points lower than the repo rate to regulate liquidity in the market, he says. When the repo rate was cut to 0.25 per cent, the deposit rate was automatically forced into negative territory. “It was not something put in place to punish banks or to force them to lend,” he says.”

  8. By Cedric on Aug 28, 2009 | Reply

    Maybe Sweden can get their banks to take risk in the Baltic region? Heard people need money there.

    If Britain could get their stodgy banks to finally take some risk, that would be a big help to.

    Glad to see the clarification posted by Jill where Sweden clarified that they don’t want to do that.

    Now could someone please forward the news to the Fed, BOE, Switzerland, ECB and BOJ?

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