There was high drama today in the world of central banking with an eye-catching policy decision that has caught the eye of markets on both sides of the Atlantic.
This was not at the Bank of England where, as expected, the Monetary Policy Committee voted to keep interest rates and the Bank’s asset purchases – Quantitative Easing in the jargon – unchanged.
No, the real action came in Sweden, where the Riksbank, the world’s oldest central bank, raised its main policy rate from -0.25% to zero.
This was a big move.
Swedish interest rates have been negative since February 2015 and the Riksbank is the first central bank to move away from negative interest rates.
Negative interest rates are deeply corrosive.
They gnaw into the profits of banks because lenders are charged for keeping money on deposit at their central bank. It also creates unease among consumers and businesses because they are a crisis measure.
In Sweden, in particular, they have also contributed to rampant house price inflation.
Between 2012 and 2017, the average price of an apartment rose by 70%, while in Malmo, the country’s third largest city, they more than doubled during that period.
The Riksbank sought to dampen runaway prices by placing restrictions on mortgages with a high loan-to-value ratio and by obliging banks to set aside more capital against their mortgage lending.
But this has only belatedly had an effect.
House prices corrected in 2018 – mainly due to a building boom getting out of control – but, nationally, have still increased on average by 60% since the Riksbank took interest rates below zero.
The question now being asked by economists is whether other central banks with negative interest rates will follow suit.
Danmarks Nationalbank (DNB), the Danish central bank, was the first to introduce negative interest rates as long ago as July 2012.
It briefly raised them above zero in 2014 but brought them back into negative territory again when, in June 2014, the European Central Bank (ECB) imposed negative rates.
The Swiss National Bank (SNB) followed suit in December that year. Then came the Riksbank.
The Bank of Japan (BoJ) cut rates below zero in January 2016.
The Riksbank justified today’s move on the basis that Sweden has returned to what it described as “a more normal economic situation” and pointed out that, since 2017, the rate of inflation had been close to its target rate of 2%.
Stefan Ingves, the Riksbank’s governor, told Bloomberg: “Economic developments in this country have been good for quite a number of years.
“Growth numbers have been high for a number of years and it was possible for us, by going negative, to get our inflation rate up close to our target.
“As far as we can judge, going to -0.25 to zero is a good thing to do given the economic conditions.
“We think that getting to zero is the right thing to do given that we will soon meet our inflation target.
“The economy is slowing down a bit but we really don’t foresee a recession, either in the global economy or the Swedish economy.
“And zero is still a very low rate.”
But plenty question why an increase was required today.
Growth is likely to be just 1.1% both this year and next, according to the Riksbank’s own forecasts, down from 2.3% last year.
Nor do bank profits in Sweden appear to have been battered to quite the extent that they have been in some other economies where negative rates prevail.
And recent survey data suggests business activity is puttering along at its weakest level since 2012.
The suspicion is that the Riksbank regrets not having raised rates sooner than it did and, having dropped plenty of hints that it was about to raise rates, felt obliged to do so today.
It may also have been motivated by concerns over household debt which, during the past few years, has risen sharply.
Economists at HSBC point out that private debt, as a proportion of GDP, is higher than anywhere else in the world apart from Hong Kong and Switzerland.
A further factor is the weakness of the country’s currency, the krona, which is trading close to an all-time low against a basket of currencies.
Swedes are outgoing people who like to travel and there has been grumpiness at how the weak krona has eaten into their spending power while overseas.
As a result, the Riksbank has found itself under attack from some high profile critics.
Goran Persson, Sweden’s prime minister from 1996 to 2006 and now chairman of Swedbank, one of the country’s big three domestic lenders, has complained at how the krona’s weakness has made it easier for foreign buyers to acquire Swedish assets.
And in May this year Carl Bildt, who was prime minister from 1991 to 1994, tweeted: “It’s embarrassing and painful to see how the Swedish crown continues to weaken against the euro. This is not good for our country!”
Days later, with unhappiness rising, Mr Ingves attended a banking conference to speak about digital payments.
However, to the shock of this peace-loving nation, he was accompanied by three bodyguards.
Despite all this, few economists expect the other central banks with negative interest rates to be following Sweden any time soon.
Both the ECB and the DNB have this year cut rates further into negative territory and the SNB has recently indicated it could do the same.
James Pomeroy, economist at HSBC Bank, told clients: “It’s worth remembering two things: first, that the economic environment in Sweden is very different from countries still with negative rates, and secondly, the reasons for exiting negative rates are very Sweden-specific rather than having a clear read-across.
“As a result, we expect none of the other central banks currently engaged in negative policy rates to change course before the end of 2021.”
Mr Pomeroy said that there were a lot of lessons in Sweden’s experience for other countries considering negative interest rates in future.
He added: “Sweden’s negative rate experience should serve as a warning to other central banks.
“While negative interest rates were effective in weakening the Swedish krona substantially, there is scant evidence that negative rates were positive for the economy.
“Inflation only moved higher once rates were raised to -0.25% (and only slightly), strong growth was largely due to excessive borrowing and the resulting construction boom and banks have felt some of the pain.
“Quite simply, the negative consequences have outweighed the positives, and that’s why the Riksbank has raised its policy rate despite a slowdown in the macro data in recent quarters.”