Higher benchmark interest rates in Sweden create financial instability as banks are forced to go abroad for short-term funding, Riksbank Deputy Governor Lars E. O. Svensson said, adding an argument to his call for rate cuts.
“Swedish banks are now choosing to fund themselves by short-term borrowing in foreign currencies, which is cheaper than borrowing in Sweden,” he said in a speech published on the Stockholm-based bank’s website. “But this entails some risks as foreign investors are an unstable source of funding.”
Svensson has advocated deeper rate cuts than the majority of the bank’s board and reiterated that rates have been too high as inflation has undershot the bank’s 2 percent target over the past 15 years. The objective shouldn’t be “prejudiced” out of consideration for financial stability, he said.
“The fact that inflation has undershot the target appears to have led to a significant real economic cost in the form of higher average unemployment,” he said.
The Riksbank in April voted 4 to 2 to keep its main rate unchanged at 1.5 percent and predicted no more cuts amid signs of a pickup in growth. The bank has cut rates twice since December after the economy contracted at the end of last year.
Two of six Riksbank board members, Svensson and Karolina Ekholm, argued for a cut to 1 percent as inflation lags behind estimates. Inflation has trailed the bank’s target in the first four months of the year, and has averaged 1.6 percent since 2000, according to data compiled by Bloomberg.
The European Central Bank’s main rate is at 1 percent, while the U.S. Federal Reserve’s rate is close to zero.
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