Riksbank’s ‘Messy’ Road to Zero Leaves Economists Confused
Sweden’s Riksbank is running into criticism from economists for not doing enough to explain last month’s historical decision to end five years of negative interest rates.
“It’s still pretty messy and unclear,” Michael Grahn, the chief economist at Danske Bank in Stockholm, said in an interview.
The Riksbank made clear it was determined to return to zero, even though inflation wasn’t quite at its target and as economic growth slowed. But its policy makers have offered different versions of why that step was needed. Two of six board members at the bank didn’t want to raise the rate. The others made separate cases for backing the move, including everything from greater clarity around Brexit to the currency.
“It’s hard to find a common denominator for this decision,” Grahn said. Board members presented “different arguments.” Part of the difficulty stems from their attempt to raise rates while sounding as dovish as possible, he said. “So it’s really one step forward, one step back.”
The confusion follows an increasingly tense debate around the merits of negative rates. Despite the Riksbank’s ambition to exit the policy, it has been clear in its defense of negative rates as the only way to fight years of disinflation and even deflation.
According to economists at JPMorgan, the Riksbank’s move, and the thinking behind it, raises “questions for the reaction functions of other central banks with negative policy rates.”
Henry Ohlsson, one of the Riksbank’s six board members, said there were concerns “over negative side effects when entering the minus world,” according to minutes of the Riksbank’s December meeting. “As far as I can see, there have not been any serious consequences yet. But we know nothing about what might happen if we more permanently find ourselves in the minus world.”
“The overall message from the meeting is that they seem relieved to have let go of that minus sign,” Bloomberg economist Johanna Jeansson said.
Governor Stefan Ingves said being back at zero gives policy makers a better vantage point from which to steer rates. Martin Floden, a deputy governor, talked of the need to restore a policy that could be “perceived as more ‘normal’.”
Returning to a “more normal” monetary policy may come in handy as the global economy faces increasingly complex threats. For many other central banks, including the European Central Bank, there are now serious questions as to how much fire power they’d have should a new wave of monetary stimulus be needed.
In Sweden, economists are now asking for a thorough review of how years of negative rates affected the economy, including financial stability and the housing market.
Robert Bergqvist, a former Riskbank economist who now heads the macro research department at SEB, says he thinks parliament’s Finance Committee should commission an external review of the Riksbank’s monetary policy.
“Many people and companies I speak to when I travel around Sweden wonder why we have had negative rates,” he said in a phone interview. “If households see this as an indication of a crisis it can contribute to increasing savings.” Swedes have tended to build up their savings in recent years, “and I think that partly reflects a concern about the Swedish economy,” he said.
But the key takeaway for now seems to be that negative rates worked, without too many bad side effects.
As Jeansson of Bloomberg Economics puts it, “We’re still here, the sky hasn’t fallen on our heads.”
©2020 Bloomberg L.P.