There have been some terrible economic ideas over the past century. Central planning condemned Russia to poverty. Nationalisation created hopelessly inefficient industries. Punitive taxes destroyed incentives, monetary meddling sparked rampant inflation and the EU managed to create a single currency so dysfunctional it has crippled a whole continent. It is hard to match those. Even so, in their own way negative interest rates were up there with the most dangerous – which is why we should all be grateful to Sweden for quietly calling time on them.
At the close of last week, Sweden’s central bank, the Riksbank, which happens to be the world’s oldest, ended its five-year experiment with negative rates. The reason? It wasn’t that the economy was too strong. It was that negative rates were not helping – and may well have been making matters worse. In truth, the Swedes have done the world a huge favour. We may need new ways of stimulating the economy. But interest rates below zero risked doing substantial damage to the economy, and the sooner central banks give up the whole misguided experiment the better.
True, even after the rate rise no one in Stockholm or Malmo is exactly going to be losing sleep over the soaring cost of their mortgage. Borrowing is still remarkably cheap by any historical standards. Interest rates were only raised from minus 0.25 per cent to zero and there are no plans to raise them any further. But it was the thinking behind the move that was significant. “If negative nominal interest rates are perceived as a more permanent state, the behaviour of economic agents may change and negative effects may arise,” the bank said in a statement on the move.
Rewind a couple of years, and negative rates were all the rage. In fairness, there was a certain twisted logic to them. In the wake of the financial crash, and faced with a permanently sluggish economy, central banks had slashed interest rates all the way down to zero or so close to that figure it made no difference. As any mathematician will tell you, once you get to zero the only place you can go next is into the minus numbers. With negative rates, it would actually cost you money to hold money at the bank, and, bizarrely, you would actually get paid to borrow as well. If that didn’t persuade people to get out and spend their cash, and to start racking up as much debt as they could, it is hard to know what would. All that extra spending should stimulate growth, at least in theory. The Swedes took rates into negative territory, and so did the Swiss, the European Central Bank and the Japanese. It might not have been long before the Federal Reserve and the Bank of England followed that lead.