Swedish central bank cuts key rate further below zero

[Knatz]

http://news.yahoo.com/swedish-central-bank-cuts-key-rate-further-below-164625984.html

 

I live in Sweden, and there's a lot of fuss about this in the news. Can someone explain it to me like I'm 5 years old?

Because who ever I try to engage in conversation about this, they just brush it off like "oh well they know what they're doing! I could never understand such complex things!"

[Laszlo]

I am by no means an expert but negative interest basically means that instead of getting interest on having money in the bank you have to pay to have your money in the bank. Wha the effects will be I don't know, but one reason for the negative interest might be a desire from the central bank to further stimulate the economy by trying to get people to spend their money instead of having them saved up a bank. The negative interest has not yet trickled down to our private banks, but it's not an unlikely scenario that it will happen.

 

There's an article with a few short bullet points at SvD where they explain what it means: http://www.svd.se/naringsliv/pengar/vad-hander-om-rantan-blir-negativ_4324607.svd

[Bilderberg CEO]

I'll try to explain it like you're a child, as requested.

When you have money in a savings account at a bank, the bank pays you a little money for keeping your money with them. This money that they pay you is called interest.

Just as you keep money at a bank, your bank also keeps money at a special bank called the central bank (Riksbank). The repo rate is the the interest rate that the central bank pays your bank to keep money deposited there.

When the repo rate is positive, the central bank is paying the private banks to keep money in their "savings accounts" at the central bank. If the repo rate is negative, however, the private banks have to pay the central bank to keep their money at the central bank.

So imagine if you had billions of dollars, and the bank made you pay 0.25% of your billions for the privilege of keeping your money deposited there. You would lose millions of dollars, so what would you do?  You would probably find other things to invest your money in and keep as little money as possible in your savings account.  The theory is that banks will do the same, and that this will stimulate the economy because the banks will lend more money, instead of keeping it at the central bank. In reality, however, this leads to bad investments, more economic bubbles and wasted resources.

[Alan C.]

The purpose of negative interest rates is to encourage people to take their money out of the bank and spend it, rather than leaving it idle in the bank. They incorrectly believe that spending drives economic growth.

[utopian]

There is a lot of turmoil in global markets and currencies right now. People are not sure where they can park their large sums of money without losing it. When a country is in trouble and needs money, the interest rate goes up, like it did with the US during the recession. When a country is sturdy with their finances, it becomes a great place to park your money, and the interest rate goes down. If it's good enough to be the best, the country can afford to charge you to hold your money, here via negative interest rate. You might lose 1% or so of your money by parking it here, but a sure loss of 1% here, is better than putting it somewhere else and perhaps losing 100%.

[Djoop]

Basicly, this measure is meant to motivate Swedish banks to require other assets than deposits at the national bank. Which is pretty weird considering that most banks -post crisis- have to raise their tier one capital as well. Anyhow, they will likely use it as an argument to lower interest payments for account holders.

 

I'm an economist in the sense that I know just as little, but these are usually not signs of a bull market.

 

An other, more easy to understand explanation is the relation between exponential economic growth and inflation. People want interest when they borrow you money because the value of their currency tends to devaluate. Vice versa, if there's no growth, no inflation, interest rates drop.    

[Djoop]

The purpose of negative interest rates is to encourage people to take their money out of the bank and spend it, rather than leaving it idle in the bank. They incorrectly believe that spending drives economic growth.

Not only that but they fail to realise that their austerity measures combined with zero wage development drives spending in the other direction.