The Riksbank, the central bank of Sweden, is the first central bank in history that has thrown in the towel on negative interest rates. During its meeting last October, the central bank had alerted that it would probably do so. Words changed into actions as it announced that it raised its repo rate to 0 percent which will be effective in the beginning of January.
Similar to economies abroad, the Swedish economy has entered a phase with lower growth. However, the slowdown is occurring after several years of high growth and strong developments on the labour market. Overall it means that the Swedish economy is going from a stronger-than-normal cycle to a more normal situation.
In addition to, inflation has been close to 2 percent since the beginning of 2017. After an expected decline over the summer, it has once again risen to just under 2 percent.
That said, one of the motives for raising its repo rate out of the negative is visible in its warning about household indebtedness which is among the highest in the world. Household debt exceeds 190 percent of disposable income - in part due to the low and negative interest rate environment that caused Swedes, as would be expected, to borrow with reckless abandon.
In fact, Riksbank's forecast is that household indebtedness will continue to rise, though it has started to dip just a little bit. With that said, the Riksbank suggested the notion that the government should take measures to tamp down on this reckless abandon and its impact on the inflated housing market.
Swedish households are heavily indebted and thereby sensitive to changes in economic conditions. In order to reduce any risks linked to household indebtedness and address the structural problems on the Swedish housing market, measures within housing and tax policy and appropriate macro prudential policy are required.
Quantitative Easing (QE) continues but at a fraction of its former rate. The Riksbank forecasts that it would end QE entirely in 2020 and start unwinding its positions and reduce its balance sheet in 2021 until all its QE government bond holdings have disappeared from it by around 2030.
Even though the Riksbank isn't the largest central bank with negative interest rates, could it be that the ECB will follow its footsteps? The ECB is now undertaking a policy review to determine how it wants to move forward. It is facing a wall of resistance against negative interest rates among the finance ministers of Eurozone member states. Their reasons being because of the damage negative interest rates do to the banking system and pension funds, and because of the housing bubblesbeing created.
Among ECB governors, the wave of resistance against negative interest rates has already boiled over the top when Draghi was still running the show. And the ECB's policy review will likely produce a Negative Interest Rate Policy exit strategy.
This article was issued by Maria Fenech, Credit Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.