As the world’s original central bank, it’s fitting that Sweden’s Riksbank has become the first to breach the zero-bound line by lowering one of its key interest rates to negative 0.25% since July 8.
The drop in the price of money below zero is reportedly the first of its kind. The dip refutes the idea that the zero bound was a barrier for monetary policy beyond which no central bank could tread. Back in 2004, Fed Chairman Ben Bernanke (a Fed governor at the time) co-authored a research paper that advised that “the nominal policy interest rate may become constrained by the zero lower bound.”
Well, so much for a constraint at zero. The Riksbank dropped rates below zero in early July with no more effort than falling out of a chair. Granted, Sweden’s -0.25% deposit rate (the rate that banks receive on accounts held at the central bank) isn’t the main tool of monetary policy in the country. That’s reserved for the repo rate (the Riksbank’s Fed funds equivalent) and it remains at a positive 0.25%, or roughly in line with the current Fed funds rate. Nonetheless, the precedent has been set. Dropping rates below zero has come and gone in the modern age of central banking and the financial world is still standing.