Riksbank: We can reduce interest rates below 0%, but this is not necessary now

Swedish Central Bank, Riksbank, says it may have to cut interest rates below zero as the Covid-19 crisis calls for extraordinary measures to support the economy. So far, the bank has left its base interest at 0%.

“However, it cannot be ruled out that interest rates could be reduced later if this is considered an effective measure to stimulate demand and support inflation in the recovery phase”, says the institution’s statement released on Tuesday.

The bank says it “will continue to buy government and mortgage bonds until the end of September 2020”.

“Although future economic development is extremely uncertain, it appears that it will be necessary to stimulate monetary policy in the form of low interest rates and a large amount of liquidity in the foreseeable future. The combination of measures that are considered appropriate is constantly being evaluated and will be adapted to economic development”, said Riksbank.

Governor Stefan Nils Magnus Ingves has repeatedly rejected the need for a return to negative interest rates. Instead, the world’s oldest central bank has dramatically expanded its existing bond repurchase program and created cheap bank loans to prevent a credit crunch.

Riksbank’s unwillingness to follow the deep interest rate cuts made by other central banks has created a global debate over the best monetary policy response to the current crisis.

Robert Bergquist, chief economist at SEB AB, said the institution’s statement confirmed that Riksbank “did not like” the negative interest rates.

Sweden already stands out for its overall approach to Covid-19, which was calmer than in other countries. Although the mortality rate in the country is now higher than elsewhere in Scandinavia, it is well below levels in the US and Italy. Moreover, Sweden’s decision to avoid total blockage may protect its economy from the difficulties that other countries are facing, according to HSBC.

On Tuesday, Riksbank said it expects the country’s economy to shrink by 6.9% this year. However, GDP could also fall by 9.7% in the worst-case scenario, the bank said.