Nick Vinocur

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Negative rates: why not?

October 5, 2009

Here’s a tip for anyone curious to know where the next generation of monetary policy tools is being dreamt up: Look north.

Sweden’s central bank – which brought us the world’s first official negative rate in July – took another swipe at economic groupthink this week in a paper that argued against a core principle of interest rate theory.

To wit: that savers would rather stuff cash under the mattress than place it in a loss-making bank account.

And with this paper the Riksbank may be sending a discrete signal to other central banks still searching for ways to boost lending in their economies that there’s nothing to be afraid of cutting interest rates below zero. 

We already knew the Riksbank had no qualms about charging big banks -0.25 percent interest on their overnight deposits. But households? For Sweden’s Monetary Policy Department, it seems there is no fundamental difference between the way banks and savers behave in times of economic uncertainty — and no reason either would refuse a slight loss on their deposits.

“In practice, the mattress is not a realistic alternative for storing and handling large amounts of cash,” the authors, Meredith Beechey och Heidi Elmér, wrote in an economic commentary published this week.

Due to the cost of safeguarding money, they write, “the public may be willing to accept a slightly negative interest rate.” The real unknown is how much of a loss households and companies would be willing to suffer in exchange for this security.