Sweden has fired another salvo in the escalating currency wars by joining Denmark, Switzerland and the European Central Bank in introducing negative interest rates. As this battle intensifies, some market soothsayers are starting to whisper about capital controls as a possible nuclear option for central banks determined to win the race to the bottom of foreign-exchange rates.
The Swedish Riskbank today introduced what it called a “more expansionary” monetary policy, cutting its repurchase rate to minus 0.10 percent from zero and announcing a bond-purchase program. Two-thirds of the 19 economists surveyed by Bloomberg News had predicted no change in rates. One U.S. dollar now buys 8.5 Swedish krona; a year ago, that figure was below 6.5.
It’s becoming increasingly nonsensical to talk about “surprise” interest rate cuts, since they are coming at a rapid clip. As my colleague Simon Kennedy put it today, central banks are now ”open all hours.” Official monetary-policy calendars are being ignored as new tactics are assessed on the fly.
Once upon a time in economic history — well, a couple of years ago — central bankers used to harp about the zero bound for interest rates and how, in an echo of quantum physics, things were likely to get weird and scary in the realm of very small interest rates. Such inhibitions are no longer on display.
The U.S. is finally starting to retaliate verbally against the dollar’s unremitting ascent, which has seen the greenback strengthen by 16 percent against a trade-weighted basket of its peers. In an interview broadcast today by India’s NDTV television channel, U.S. Treasury Secretary Jack Lew said he’ll “oppose and push back very hard” against devaluations designed to boost exports:
There is a very big difference between countries that use domestic tools for domestic purposes, macroeconomic tools to grow their economy which is something that in the world community we have agreed to and we in the United States have used in QE for example. On the other hand, it is another thing to target your currencies for the purpose of gaining an unfair trade advantage.
Central bank quartermasters are stockpiling yet more ammunition for the currency wars. Switzerland, Denmark and Sweden have all said they see scope for even deeper rate cuts to deter investors from holding their currencies, never mind the crushing effect on domestic savers. Denmark is so desperate to defend its peg against the euro that it has offloaded about $30 billion worth of kroner since the start of the year to keep a lid on its currency; economists are now speculating about Denmark introducing the lowest interest rates in the world later this week, at minus 1 percent or even minus 1.25 percent.