The verdict is in.
Sweden’s extreme negative interest rate policy has failed, serving only to inflate a housing bubble.
The country’s central bank, the Riksbank, has had an interest rate of -0.35 since the beginning of 2015 in an effort to boost inflation. That requires banks to charge a deposit rate of -1.1%, because Swedish interest rates move in a lock-step “corridor.”
Even with a -1.1% deposit rate — the lowest in the world — inflation hasn’t budged at a measly 0.1% and is still miles away from the central bank’s 2% inflation target.
The Riksbank also missed the mark on its other objective to make exports cheaper and more competitive through a weaker currency. The krona weakened for a few months but is on the way up again.
It’s important that negative interest rates haven’t worked in Sweden, because if the policy would work anywhere, it would work there.
The country is becoming increasingly cashless, meaning that people aren’t hiding their wealth from sub-zero deposit rates in bundles of cash under the sofa.
HSBC analyst James Pomeroy has been following the experiment closely, and has the numbers on Sweden’s cash situation. Here’s his comment (emphasis ours):
Sweden is slowly becoming a cashless society, with more than 95% of retail sales made with electronic payment.
The amount of cash in circulation has fallen by 27% in 5 years and continues to fall. In such an environment, the impact of negative rates on household behaviour, growth and inflation are much more evident than they may be in either the eurozone or Japan.
In a cashless society, the alternative of withdrawing cash rather than accepting the negative interest rate becomes less feasible and the effects of negative rates may be seen more clearly.
While other societies are having trouble kicking the cash habit, Sweden is forging ahead:
And here’s inflation, which is going absolutely nowhere:
So where has all the price inflation gone? Well, it’s either been killed off by the internet, which Swedes use more than most to find the best prices for goods. Or it’s rearing its head in the form of rampant housing inflation, and isn’t being picked up by official figures.
Either way, the lack of inflation in a country of negative rates doesn’t bode well for proponents of the policy elsewhere. And the cost of the policy — a gigantic housing bubble — could be huge.
Here’s Pomeroy again:
Altogether, we would argue that the move to negative rates has been unsuccessful.
Inflation remains close to zero, the currency has strengthened and although growth has improved, this has come at the cost of a housing bubble.
This is concerning, given the absence of macroprudential policies being implemented and estimates from the National Institute of Economic Research that suggest that a 20% fall in house prices would lead to a recession-like impact on consumption and unemployment. While that does not look likely, given the pace of the price gains, it remains a worry.
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