Sweden’s central bank, the Riksbank, just slashed its main interest rate to zero. That’s zero as in nothing, nada, 0%.
It’s a rare move for a central bank. Normally, central banks that want to boost their economies and fuel a bit of inflation like to keep their interest rate nominally above zero — at 0.25% or 0.5% — in order to maintain the fig leaf that they’re not targeting a “no-interest” interest rate. Being just above zero still gives you one last weapon to use, in the form of a cut to zero, in case things get really bad.
But in Sweden, the figleaf has now been abandoned altogether. They’re now looking at negative interest rate territory as the next place to go — a situation most people only hear about in theory in macroeconomic classes. The European Central Bank started flirting with that policy in June.
The country doesn’t use the euro, but like the rest of the eurozone it is also mired in a low inflation and deflation scenario. The most recent inflation data for September recorded a 0.4% drop in prices compared to the same month last year.
Like the European central Bank, the Riksbank tried to hike interest rates as the economy appeared to be recovering in 2011. It’s since been forced into an embarrassing u-turn.
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