Negative elements caused by rates below zero have largely supplanted positive ones

The Central Bank of Sweden, aptly named "Riksbank" has decided to end the experience of negative interest rates. It increased its main policy interest rate to zero percent. The ten-year bond rate increased from minus 0.40% to plus 0.08%. Placing at ten years to gain rather nothing, this remains very disappointing in terms of return. Such a long commitment to simply recuperate your principal. Isn’t it weird? But the fundamental question that pains us all is whether the other Central Banks, including the ECB, will dare to follow the Swedish.

What are or remain the advantages of having still negative interest rates? I always wonder if there are still advantages of remaining below zero percent. Going back to zero percent in the EUR zone would change everything. Banks suffer excruciatingly from this persistent negative side. Going lower would be even worse and would not change anything if it did not even sink the already damaged stakeholders (e.g. banks and insurance companies). After 5 years of negative Swedish interest rates, what have been the results? We still wonder.

Inflation should not be our worst enemy. It is rather under control in the Western countries. The Swedish gesture may surprise while their economy is still suffering. True. The Swedish economy slowed down badly in 2019. So why this move against the tide? What if the Swedes were better inspired? The business confidence is weak, the state of industries remains weak, trade tensions look strong, the outlook is bleak, and inflation is limited to 2%, which seems more than reasonable.

In my opinion, the negative elements caused by rates below zero percent have largely supplanted the positive elements. The negative consequences hurt more than the positive consequences. Perhaps the solution would be situated in an intermediate level, at zero rate. Individuals (via retail banking) have been impacted in their savings, the financial sector has seen its profitability plummeted and seriously affected, at the risk of destabilizing the whole sector. Mortgage loans are exploding (as they are become so cheap), possibly creating financial and real estate bubbles and high household debt.

Let us not relive the “sub-prime” crisis. Finally, the company that borrows at a "floored" rate will not be penalized since it already pays only the spread / the margin. This will allow for (slight) recovery in long-term rates. Would it be absurd to think that the Swedes could inspire Christine Lagarde and the ECB? The Swedish crown will strengthen slightly. But let's not forget where it came from after a sharp depreciation in recent years. The Krona will not peak up immediately with the risk of penalizing exports. The Swedish Central Bank was not the first to enter negative interest territory. However, it is the first to return to zero percent. Congratulations for this courage and this economic intelligence.

In my humble opinion, the future will show that it was a wise decision. Even if it stays at zero, the zero is much better for all than the below zero. The Swiss have announced a possible even more negative dive (we are at minus 0.75%). The Danes have indicated that this negative character could last a whole decade and even further. On the other hand, for the ECB, this Swedish decision could constitute a very interesting experimental laboratory. The future will tell us whether it was a good decision or not. No one can say at this point. But I think States could continue to benefit from improved debt service, while the banks could avoid cruel decisions to tax current accounts and limit breakage and damages.

Zero rates would enable the best of both worlds, to maximize the benefits for each other, or to prevent the benefit for one from being exorbitant in terms of cost to others. It would also avoid explaining to the general public and ordinary retail customers that their savings will be penalized at a negative rate and that they will lose money over time. It is too early to say that this decision was wise. But we can hope so. I hope that the European Central Bank will watch Swedish developments carefully and draw inspiration from them soon, before the damage to financial institutions, insurance companies and other pension funds is too great. These three sectors are suffering from persistent negative rates. Cross our fingers because otherwise it could generate a deep and systemic financial crisis.

François Masquelier

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