Interest rate and inflation

Interest rate and inflation

Interest rate is related to the currency, inflation and net export. Basically speaking,

the normal interest rate cannot be below zero. But last month the Sweden central bank cut the interest rate to -0.1%. Here is the news I got from BBC.

After that, some economists said that Sweden became the latest Scandinavian state to join Europe’s escalating currency wars. So why it happened?

This graph showed the tendency of interest rate in Sweden. After the financial crisis in 2008, Sweden kept a low interest rate which comes near to 0. Apart from the quantitative easing policy, there are some other significant reasons.

l  The instability of global economy is increasing, especially in Europe.

l  Stimulate the economy with expansionary monetary policy.

l  To relive the risks of long-term deflation and low oil price.

Central bank negative rates are intended to encourage companies and individuals to borrow more, increasing investment and consumer spending and driving up inflation.

In the other word, the deflation in Sweden hinders the economy. Deflation can be regarded as the negative inflation, Sweden suffered from the deflation recent years.

 

 

The deflation means that the prices, money supply and economic growth continue to decline, which will finally cause the high unemployment and recession. it usually begin with the price declining, falling prices mean consumers hold off purchasing goods in the belief that they will get even cheaper, which in turn damages the economy as demand drops, producers suffer and unemployment ensues. Sweden's price growth of just 0.1 percent is well below the central bank's target of 2 percent and this has put pressure on the Riksbank (central bank in Sweden) to stimulate more spending, which could be problematic for a country with high levels of borrowing and household debt. The low interest rate policies are aimed to ride up the inflation rate to 2%, so that the country could avoid the risk in Japan, Japan experienced what has become known as a "lost decade" to deflation in the 1990s.