The most momentous rate decision this month isn’t Fed or ECB

Bloomberg

The world’s oldest central bank stands to be the most significant this month as it pioneers a shift away from negative interest rates.
Sweden was among the handful of economies that reduced key interest rates half a decade ago below zero. Now officials at the Riksbank — founded in 1668 — insist the policy has done its stimulus work, so their so-called repo rate can stop being negative.
That puts the rich Nordic country in the spotlight of global monetary policy as counterparts watch nervously to see how easy it is for the experiment of subzero rates to be unwound. While the Federal Reserve has firmly resisted US president Donald Trump’s calls to venture into negative territory, officials in the euro zone, as well as Switzerland, Denmark and Japan, all find themselves in the same boat as Sweden.
“A Riksbank hike in December would be a signal that central banks admit that there’s a downside to too-low interest rates,” said Thomas Elofsson, a portfolio manager at Catella in Sweden. “It will be interesting to follow how the SNB and the ECB communicates and acts with this new mindset.”
The Riksbank decision on December 19 promises more monetary action than central banks in the US and the euro zone delivered last week. All 18 economists surveyed by Bloomberg predict a quarter-point increase in Sweden’s main policy rate from the current minus 0.25%.
The Fed on December 11 signalled an extended pause, while the next day, Christine Lagarde, at her first press conference as European Central Bank (ECB) president, emphasised an upcoming review of the institution’s strategy rather than any impending policy moves.
Sweden’s shift is taking place against a global backdrop of worries about the harmful effects of subzero policy. Complaints by banks about profit margins have grown louder, while both the Riksbank and the ECB were among central banks warning last month about the financial stability risks.
A key idea behind subzero policy is that it should stimulate growth by encouraging financial institutions to lend money rather than hoarding it. But ECB officials have noticeably cooled on the measure since they cut their deposit rate further in September to minus 0.5% to shore up a slowing economy. They increasingly cite the harmful effects, even though they’re not yet close to reversing course.
“The Riksbank’s desire to ‘escape’ negative rates due to various side effects is the main driver of the expected 25bp repo rate hike,” economist Tiia Lehto at Citigroup Global Markets said in a note on Monday.