I do follow Riksbank moves pretty closely (apart from some interesting developments at Riksbank, see this, this and this) but missed this news completely. Riksbank in its monetary policy meeting on 2 July 2009, lowered its main policy rate – Repo rate by 25 bps to 0.25%. It also revised its growth and inflation forecasts lower.
However, in one of the paras was hidden this very important move:
The deposit rate is at the same time cut to -0.25 per cent and the lending rate to 0.75 per cent.
Before I discuss this further, here is a look at what each of the rates mean in Sweden:
Repo rate: The Riksbank’s most important policy rate, which is used to influence short-term market rates. The repo rate is the rate that banks receive or pay when depositing or borrowing funds at the Riksbank for a period of seven days.
Deposit rate: Overnight rate of interest paid by the Riksbank on money held in accounts with banks.
Hmm. if banks want to submit overnight deposits at Riksbank, they will have to pay riksbank 0.25%. For 7 day deposit they still get 0.25%. This is mainly done to push banks to discourage banks to park excess reserves with the Riksbank.
Cutting the repo rate to 0.5 per cent means that the interest rate corridor, that is the Riksbank’s deposit and lending facilities, should be modified as the current corridor construction would in this case entail a negative deposit rate. Material was presented proposing a slightly narrower corridor that entails the Riksbank’s lending rate and deposit rate being set at 1.0 per cent and 0.0 per cent respectively with a repo rate of 0.5 per cent
Hmmm. so discussions started in April itself. What seemed bizarre when suggested by Mankiw, Buiter, Krugman and Sumner (see TNR Blog for related links), is indeed taking place.
Riksbank seems to be pioneering another development in central banking. Wow! This should generate tons of research going ahead. It is no more a case of zero bound for monetary policy at all. If Riksbank is successful, the question would be how much negative?? It will be interesting to see the Minutes of July Riksbank meeting to be released on 16 July 2009.