This has not gotten much press here in the US and got by me. Needless to say this is uncharted territory as the Swedish Central Bank is charging banks to hold their excess reserves in a bid to force them to lend.
As the world’s original central bank, it’s fitting that Sweden’s Riksbank has become the first to breach the zero-bound line by lowering one of its key interest rates to negative 0.25% since July 8.
The drop in the price of money below zero is reportedly the first of its kind. The dip refutes the idea that the zero bound was a barrier for monetary policy beyond which no central bank could tread. Back in 2004, Fed Chairman Ben Bernanke (a Fed governor at the time) co-authored a research paper that advised that “the nominal policy interest rate may become constrained by the zero lower bound.”
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In practical terms, the Riksbank’s -0.25% deposit rate means that banks with accounts at the central bank are paying Riksbank 0.25% in interest to keep deposits at the institution. In effect, the arrangement turns the concept of a bank account on its head. Instead of earning interest, depositors are paying the bank to maintain the accounts.
The rationale for the policy is that the negative interest rate will create a disincentive to hoard money, which creates an additional layer of headwind for an economic recovery. In these precarious economic times, that’s considered a risk worth avoiding.
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Rest assured, the Federal Reserve and other large central banks in the world are nowhere near the point of following in the Riksbank’s footsteps. That’s because there’s no need to drop rates below zero in the U.S. and elsewhere at the moment. The worst of the Great Recession seems to have passed.
My comment: I would not take this off the table for the US FED as I expect another leg down in the economy and the markets. This could really blow the lid off of the gold price. If interest rates are negative then gold becomes free to hold as money market funds will be a losing proposition. This will be interesting to watch as it develops. Is there a currency play here?
John Polomny
The Real Deal
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