Repo rate cut to −0.35 per cent and purchases of government bonds extended by SEK 45 billion

By Xuefei Chen Axelsson

Stockholm, July 3 (Greenpost)– Swedish Riksbanken has decided to cut repo rate to minus 0.35 percent.

“Inflation is rising and economic activity in Sweden is continuing to strengthen. But uncertainty abroad has increased and it is difficult to assess the consequences of the situation in Greece. Since the repo-rate decision in April, the krona has also become stronger than the Riksbank had forecast and the development of the exchange rate remains a risk to the upturn in inflation. In this uncertain environment, monetary policy needs to be even more expansionary to ensure that inflation continues to rise towards the target of 2 per cent,” explained the central bank in a statement on July 2.

The Executive Board of the Riksbank has therefore decided to cut the repo rate by 0.10 percentage points to -0.35 percent and to extend the purchases of government bonds by a further SEK 45 billion with effect from September and until the end of the year.

It is expected that Swedish GDP growth rate will be 2.9 percent in 2015 and 3.6 percent in 2016.

The following is the Q&A with Governor Stefan Ingves:

Governor Stefan Ingves, what does the decision on a negative repo rate entail?

Why do we have a negative repo rate when things seem to be going fairly well for Sweden?

“GDP growth is fairly good and the labour market is strengthening gradually, but inflation is too low in relation to the Riksbank’s target for inflation. In recent months, inflation has begun to rise and the repo rate needs to be this low so we can be sure that inflation will continue to rise and attain the target. It is important that this happens as the inflation is the keystone for stable economic development in Sweden. The target functions as a benchmark for expectations in the economy and thereby lays the foundation for efficient price-setting and wage formation. Many people assume that inflation will be around 2 per cent. They should be able to rely on this being the case.”

What does a negative repo rate mean for a normal household

“The Riksbank’s repo rate is negative. But this does not necessarily mean that the lending rates charged to households and companies will be negative. These interest rates are usually higher than the repo rate. But one might expect that interest rates will be unusually low in the coming years.”

Does it mean that the banks will now expect their customers to pay to make bank deposits?
“Our repo rate has been cut to just below zero. Normally, this would lead to somewhat lower interest rates for households and companies, which would in turn increase consumption and investment. It is too early to say whether this will lead to the banks beginning to charge their customers when they deposit money and it is something the banks must decide for themselves.”

What is the message to all small-scale depositors who are worried that their money will be eaten up by interest payments?

“We are in an unusual situation. The economy is performing fairly well, but inflation is too low and the international situation is uncertain. A repo rate just below zero gives a further boost to household consumption and company investment. Together with the repo-rate cuts we have made earlier, this gives higher inflation in the long run and higher interest rates, which will also benefit all savers. It will take us back to a more normal situation in the Swedish economy and this will be good for us all.”

What does the negative interest rate entail for the banks?

“When the repo rate is negative, the banks have to pay when they need to deposit money with the Riksbank. The banks can either invest money for a whole week by buying Riksbank Certificates or overnight through so-called fine-tuning transactions. When they buy Riksbank Certificates, the banks have to pay the repo rate, that is, -0.25 per cent. For overnight deposits, the banks pay a fine-tuning interest rate that is the repo rate minus 0.10 per cent, that is, -0.35 per cent.”