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Negative interest rates in Sweden have “had the intended effect” without significantly damaging the wider economy or financial markets, the Riksbank has said, as it strongly defended its programme of monetary stimulus despite the strength of the wider economy.

The central bank has maintained its commitment to record low interest rates and signaled it may cut them even further, despite strong economic growth and worries about overheating in the country’s housing market – an issue on which it has repeatedly requested urgent government action.

Referring to the criticism its recent dovishness has attracted, the Riksbank said in an annual review of its policies on Wednesday that “one forgets that the current strong economy in Sweden is a consequence of the monetary policy that has been conducted”.

The report said Sweden’s inflation rate is “on the right track” despite the fragility of the recent rise, and said the economy would be “weaker and less favourable than is now the case” if it had not kept up its stimulus programme.

In response to the country’s rapidly rising house prices, the Riksbank acknowledged that its monetary policy “does contribute to the risks increasing somewhat”, but said it is not the main cause.

It also stressed that focusing on inflation is more important than concerns about housing, noting:

The executive board’s view is that the Riksbank, in a situation where confidence in the inflation target is showing signs of weakening, cannot disregard this decline in confidence to try to dampen developments in housing prices and debt. The problems on the housing market are essentially structural and if confidence in the inflation target were to be lost, it could be difficult and costly to restore it.


The report also addressed concerns that the bank’s asset purchases may be creating distortions in local bond markets. The Riksbank now holds around 40 per cent of the outstanding stock of krona-denominated government bonds, but it said “several indicators point to the Riksbank’s bond purchases having had a limited impact on market liquidity”.

It admitted that “the picture is not unambiguous”, but said “the overall assessment is that the Swedish government bond market is still functioning relatively well”.

Copyright The Financial Times Limited 2017. All rights reserved.
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