Economic Commentary: How far can the repo rate be cut?
Date
30/09/2015
The negative repo rate has so far had a more or less normal impact on the Swedish economy. But just how far can the policy rate be cut before the impact is reduced? This economic commentary discusses the experiences of negative interest rates in Sweden and highlights a number of aspects that affect how far it might be appropriate to cut the repo rate.
The lower limit of the repo rate ultimately depends on costs associated with holding cash. Since cash earns zero interest, it might become increasingly attractive to withdraw money the more one has to pay to keep it in a savings account. But holding cash can be both expensive and complicated so the likelihood is that the interest will have to fall some way below zero before it happens. In addition, risks to the financial system increase, the lower the rate goes. How far it is worth cutting the repo rate will therefore be a question of judgement, in which greater risks and the reduced impact on saving and lending rates will be factors that have to be taken into consideration.
