Sweden's New Inflationist Strategy
Anyway, what the Riksbank decided was to reduce its main interest rate from 0.5% to 0.25% and start with quantitative easing. There's nothing unusual or new about that these days, as near zero interest rates and quantitative easing are the rule rather than the exception for central banks in advanced economies. What was unusual was that this decision meant that the interest rate on bank deposits in the central banks was cut to -0.25%. That's right, a negative interest rate. The reason why they now have a negative deposit rate can be found in the reason why it is considered nearly impossible to bring market interest rates below zero: namely that people would then start to withdraw their money. By having a negative deposit rate, the Riksbank hopes to discourage banks from keeping the money they receive from quantitative easing as reserves. Instead, they want the banks to create more credit, something which in turn will increase money supply, something which in turn will increase inflation.
The most radical inflationist in the board, Lars E.O. Svensson, has advocated currency market intervention to bring down the exchange rate of the SEK, which in turn is meant to increase import prices and inflationary expectations. The rest of the Riksbank board decided against it, probably because other countries could interpret this as a way to subsidize exports and discourage imports, rather than as a way to increase inflation. The strategy they are now pursuing will also lower the exchange rate of the SEK, but probably not by as much and not in such a conspicuous way.
One interesting question that the Riksbank's negative deposit rate this raises is why the Fed insists on paying a positive interest rate on bank reserves. If you want to achieve inflation, which the Fed wants, then that is counterproductive as it encourages banks to keep the money at the Fed instead of lending them out to the public. As I've pointed out repeatedly, the monetary base has no direct effect on the real economy. It only has an indirect effect to the extent it helps increase the money supply. But as long as the banks keep the money they receive from the Fed's asset purchases at the Fed, money supply is not affected.
I am not sure why the Fed insists on having a positive deposit rate, since it counteracts the inflationist effects of their other schemes, but one possible reason is that it wants to subsidize the banks and boost their profits. By paying interest on their deposits, the Fed is essentially giving away money to the banks. Another possible reason is that they think that large reserves are essential to restore confidence in the banking system.