Sweden’s central bank, one of the pioneers in wielding negative interest rates, became the first to end that policy Thursday, a move closely watched by other institutions that have resorted to what was supposed to be a radical and short-lived measure.
In 2009, the Riksbank, the world’s oldest central bank, became the first to charge commercial banks to hold deposits rather than pay them interest. In 2015, it lowered its key policy rate below zero, following a similar move by the European Central Bank the year before.
On Thursday, the Riksbank raised the key rate to zero from minus 0.25%. The bank moved because a majority of its policy makers expect inflation to be close to its 2% target over the coming years. Some policy makers have also become more concerned that a longer period of negative interest rates could lead businesses and households to take on too much debt, or force banks to charge to accept deposits, which could lead to a rush into cash.
But it signaled caution, indicating it has no plans to raise its key rate further in the coming year. Underlining that caution, two of the six members of the executive board— Anna Breman and Per Jansson —opposed the move, preferring to wait until it is clear that the weak economic growth forecast by the central bank for coming years won’t pull inflation down.
With a similar focus on inflation, policy makers around the world are watching the broader impact of the Swedish experience, where subzero rates have stimulated the economy but have also driven household debt higher and weakened the country’s currency, the krona.
Most other central banks have abandoned plans to tighten policy as growth slowed this year, with both the U.S. Federal Reserve and the ECB reversing course to provide more, not less stimulus.
In the eurozone, negative rates are exceedingly controversial in countries like Germany, where many fear they keep unproductive companies alive, hurt bank profits and subsidize profligate governments by making debt extremely cheap.
The ECB’s policy-making committee is deeply divided over the efficacy of negative rates, with some arguing their impact has long waned and could become counterproductive.
The Bank of Japan introduced negative rates in early 2016 as part of its long struggle to raise inflation. In the U.S., President Trump has sometimes urged the Federal Reserve to adopt a negative policy rate.
The Riksbank’s move means it is the first to leave negative rates behind since they became a more common tool for central banks from 2014. Denmark’s central bank briefly raised its then negative key rate above zero in early 2014, before dropping it back below zero later that year in response to the ECB’s move.
Unlike its peers, Denmark’s central bank focuses on keeping the rate of exchange of its currency against the euro steady. That makes its interest rate movements less instructive for other central banks that allow their currencies to float and aim to steady the inflation rate.
“All central banks watch each other,” said Laurence Boone, chief economist at the Organization for Economic Cooperation and Development. “I don’t think negative rates have ever been seen as there to stay forever.”
By discouraging commercial banks from parking their money at central banks, negative rates prod financial institutions to lend at low cost to other banks, businesses and consumers, in turn pushing people to borrow more, spend more and save less. Negative rates can also weaken the national currency, delivering a boost to exports and increasing prices of imported goods to fuel inflation.
That dynamic has partly worked in Sweden, helping to boost growth and employment. Swedish economic growth surged in 2015, and remained above that of the neighboring eurozone in most subsequent years, while its jobless rate has edged lower.
Swedish economic growth surged in 2015 to 4.4%, then cooled to 2.4% in both 2016 and 2017, and 2.2% last year.
Subzero rates have also pushed more money into equities and bonds, with holdings in mutual funds reaching all-time highs since rates went negative, said Gustav Sjöholm, savings economist at the Swedish Investment Fund Association.
As inflation has picked up and the interest paid on bank deposits has fallen, Eric Entrena, an administrator in the Swedish school system, has sunk more money into stocks. “If you have inflation of 2%, you will have 2% less money,” says Mr. Entrena, 45. “What I’m trying to do is buy shares.”
House prices also felt the effects of negative interest rates, although a shortage of homes and low borrowing costs had been pushing prices higher even before 2015.
At the same time, private debt in Sweden climbed to 285.7% of annual economic output in 2018 from 273.8% in 2015, according to OECD figures.
Among the OECD’s 36 members, it was higher only in Ireland, the Netherlands and Luxembourg. But in Ireland and the Netherlands, debt was falling. In the U.S., private-sector debt was almost unchanged over that period, edging up to 211.8% of gross domestic product from 211.3%.
The decision to end negative rates has stirred a debate over whether the Riksbank’s primary policy goal should be keeping inflation steady.
The inflation targeted by the central bank has picked up since interest rates went negative, to 1.7% in November 2017 from 0.6% in January 2015.
“It can’t always be justified to push inflation up to the target level when it can lead to imbalances and create risks,” said Kerstin Hallsten, chief economist at the Industrial Employers Association, who left the central bank in 2018 after 26 years.
As in other parts of Europe where central banks have adopted negative rates, critics of the policy say the narrowness of its inflation goal prevents the Riksbank from taking account of its potentially harmful side effects, such as higher debt levels and a weaker currency.
But another group of critics worries that the central bank is raising rates just as signs are emerging that the economy is slowing on the back of falling demand for the country’s exports, which means there is a risk that inflation will fall back next year.
“The problem is instead that it might be perceived as the Riksbank deviating from what it normally does: designing monetary policy so that it is always very clear that the inflation target is the point of departure,” said the Riksbank’s Mr. Jansson, in a speech earlier this month.
Some of the loudest complaints about the Riksbank’s policy have focused on the weakening of the country’s currency, the krona, since negative rates were introduced.
Johannes Medlock is a 46-year-old advertising professional who travels to the U.K. regularly, and the U.S. occasionally. In recent years, he has seen the cost of those trips rise.
“I was very aware of it,” he said of a recent trip to the U.K. “I noticed a big difference.”
Policy makers’ interest in the impact of negative rates is high because many expect them to be a tool to combat future recessions.
Economists expect the so-called “equilibrium” real rate of interest below which borrowing and inflation surge to be lower than in the past. That is because, as populations age, more people save, driving down interest rates.
As a result, periods in which the equilibrium rate is so low that central banks could only match it by moving their key rates below zero may become more common, particularly in downturns.
—Dominic Chopping contributed to this article
Write to Paul Hannon at paul.hannon@wsj.com
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