http://www.bbc.com/news/business-31436657
Sweden's central bank cut its key interest rate from 0% to -0.1%. They have also started quantitative easing, which is used when standard monetary policy does not work to stimulate an economy. The government is prepared to use more expansionary monetary policy to continue the global economic recovery.
5 comments:
I think deflation is not a a good policy to stimulate growth because it lowers the incentive for growth. However, considering how the same deflation can increase real incomes, the Swedes might actually have it right.
Sweden's deflationary policy could prove dangerous in the long term with negative yields. This could lead to a run on the banks with negative interest rates, with withdrawals into hard currency or commodity investments being far more likely than facilitating spending. This move also shows the desperation of Swedish economic planners in trying to boost their economy. While they are trying to remain at a competitive price point with the Euro, the knock-on affects of this move may prove more of a headache for the Swedish economy.
For every person who borrows money for investment, someone on the other end needs to be lending them that money. Now the supply of people willing to lend will be so low that people will not be able to invest enough to stimulate the economy anyway, at least in my opinion. I think they should see how well the QE works before they go that far with the interest rates.
I think that the deflationary policy is fine for the short term but could prove devastating in the long run. Too long of a deflation period can lead to high unemployment and a stagnant economy.
Deflationary policy could be detrimental to an economy. If people expect prices to continue to drop people will hold out on purchasing products because they expect the price to fall. This leads to people never purchasing products because they are always waiting for the product to hit its lowest point and then purchase but if expectations are that it will keep falling people will never buy.
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