What should a central bank do next when it already has zero interest rates and arguably still faces the threat of Japanese-style deflation? If it’s the Swedish Riksbank, it should keep cutting, and do so soon, says Lars Svensson.
Svensson no longer has a say; he quit as a deputy Riksbank governor last year after failing to persuade fellow board members to cut rates aggressively. Last month, they heeded his advice, lowering the repo rate to 0 percent and pushing back the official forecast for when the Riksbank will start tightening monetary policy again to mid-2016.
After years of tense, polarized meetings that eventually led to Svensson’s resignation, a united Riksbank now sees zero rates as enough to push inflation up toward its 2 percent target.
Svensson disagrees, saying Sweden should go into negative rates – effectively charging banks to deposit funds at the central bank – to avoid the deflation which has trapped Japan in low economic growth punctuated by periodic recessions for more than a decade.