Thursday, February 12, 2015
Sweden Central Bank Cuts Interest Rates To Avoid Deflation
Sweden has joined other central banks in the US, Denmark, UK and the EZ in the use of extraordinary monetary policies to ward off price deflation. Banks can now borrow money from Sweden's central bank at negative interest rates. That is, the sum that they payback to the central bank will be less than the amount that they borrowed. Although Sweden is not part of the EZ, its economy has been damaged by the decline in economic activity in the EZ. Like most central banks, Sweden's central bank has an inflation target of 2%. Currently, the inflation rate is well below its target rate. Price deflation is harmful to the economy because consumers expect prices to fall further and they delay spending. Corporations delay investments as well; they risk losing money if prices fall below plan. Borrowers are also harmed by deflation; they must pay down the debt with more valuable money.