Amid housing bubble, Sweden ends negative interest rates

·Finance and news reporter
Trosa, Sweden, Europe. (Photo by: Luca Picciau/REDA&CO/Universal Images Group via Getty Images)
Homes in Trosa, Sweden. The country is experiencing a housing bubble. Photo: Luca Picciau/REDA&CO/Universal Images Group via Getty Images

Sweden’s central bank on Thursday raised interest rates, pulling its benchmark rate out of negative territory for the first time in five years.

Though the increase brings the rate from –0.25% to 0%, the Riksbank said it was concerned that if negative rates were to continue, banks in the country may begin to pass negative interest rates onto households.

Negative interest rates effectively mean that banks and depositors incur a charge for holding their money with a bank, something that is meant to encourage lending.

But such low interest rates, the central bank said on Thursday, “can create incentives for excessive risk-taking in the economy”.

In a tacit reference to Sweden’s housing crisis, the bank warned that “assets may become overvalued, risk may be incorrectly priced and the indebtedness of various agents may increase in an unsustainable manner.”

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In 2009, the Riksbank was the first central bank in the world to implement a negative interest rate.

The bank, the world’s oldest central bank, thus became a pioneer in a policy initiative that is now drawing scrutiny across the world.

The European Central Bank in September lowered one of its key interest rates into record negative territory, while Switzerland, Denmark, and Japan also have negative interest rates.

Analysts have blamed a combination of negative rates and a shortage of housing for a doubling of Swedish property prices over the past 15 years.

Mortgage lending in Sweden now accounts for roughly 75% of all lending in the country, meaning that banks could end up being highly exposed if the housing bubble were to pop.

While the Riksbank noted that most companies in the country feel like low interest rates have been “positive” for their business, the bank believes that they should only ever be seen as a temporary measure.

“If negative rates are perceived as a more permanent state, there is a risk of various agents changing their behaviour in a way that is negative for economic development,” it said on Thursday.

Only a small proportion of bank deposits are subject to negative rates in the country, the Riksbank said, noting that these are typically only financial corporations and parts of the public sector.

But it noted that the introduction of negative interest rates on household deposits could not be ruled out, pointing to moves by banks in Germany and Denmark.

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Analysts noted that, while the move was well signalled, it was unlikely to boost the Swedish crown in the long run.

“It has become pretty clear over recent meetings that policymakers have become warier about negative rates becoming a more permanent state of affairs, and the effect that might have on people’s expectations,” said James Smith and Petr Krpata, analysts at ING.

The Riksbank indicated on Thursday that it was unlikely to hike rates again in 2020.

“This is very much a one-and-done move,” said Smith and Krpata in a note.