Keep an eye on Sweden's interest rates

The Sveriges Riksbank, the country’s central bank, ended a four-year experiment with a negative interest rate policy (NIRP) at the end of 2019 amid growing concern that it was pumping up a private sector debt bubble and distorting the financial system. Market commentators said that the move could herald the start of a global trend away from NIRP. The eurozone and Japan currently have negative rates. 

Yet a finance ministry report released this month was interpreted as “a thinly veiled message to the central bank” that rates should be cut back below zero, says Bloomberg. With growth expected to come in at just 1.1% this year, it seems the government is keen for some monetary support.

Weak inflation, which remains below the 2% target and is expected to fall further over the next two years, may well force the Riksbank’s hand, says Melanie Debono for Capital Economics. We think that the bank “will cut rates back below zero this year as slow growth keeps a lid on inflation”.

On the contrary, an improved outlook for global trade and an undervalued currency could yet see growth and inflation surprise on the upside, says Pierre Gave of Gavekal Research. Sweden’s small and open economy has “a habit of leading economic cycles”, making it something of a global economic “bellwether”. Keep an eye on it.