To boost spending in any economy you would assume that the central bank would reduce interest rates – encourages borrowing and reduces saving. But very low interest rates could encourage people to hold cash rather than keep the money in the bank – this could slow economic activity in the economy.
Sweden’s central bank – Riksbank – has gone negative with interest rates. Sweden has the third highest savings rate in the developed world but there is a significant positive output gap. With inflation at 0.2% it remains well below the central bank’s 2% target but the mandate from the Swedish government encourages radical measures to rectify the threats of deflation.
But with lower rates in the eurozone to stimulate growth this has weakened the Euro against the Swedish krona making Swedish imports cheaper and putting further deflation pressure on the economy. Therefore the Riksbank has had to cut its own rates in response in an attempt to avoid deep deflation. Switzerland has also go the negative way with a rate of -0.75%.