Former Riksbanker Slams ‘Irrational’ Plan to Exit Negative Rates

(Bloomberg) --

Former Swedish central banker Lars E.O. Svensson has described plans by the Riksbank to raise interest rates while inflation remains stuck below target as irrational, wrong and unjustified.

The professor of economics at the Stockholm School of Economics has a long history of clashing with the central bank’s majority view, including when he served on the Riksbank board, from 2007 to 2013.

Governor Stefan Ingves and his team are eager to end almost five years of negative rates. The market expects them to raise the key policy rate at their next meeting in December, from minus 0.25% to zero. The consumer price index with a constant interest rate (CPIF) came in at 1.5% in October, well below the central bank’s 2% target.

“Since inflation, current as well as forecast, is below target, there are no monetary policy reasons for these hikes,” he said in an emailed response to questions. “Rather, they appear to be based on an irrational fear of negative rates.”

According to Svensson, the central bank risks repeating past mistakes and appears to be trying to normalize the repo rate, rather than normalizing the target variables.

Read more: Krugman Target of Indignation as Swedes Reject Japan Comment

“This policy has already been tested on a large scale, with the 1.75 percentage-point increase of 2010-2011, and the result was frightening,” he said.

©2019 Bloomberg L.P.