The post-crisis atmosphere in the global economy has in many ways encouraged a foray into increasingly desperate monetary policy measures in an effort to restore economic growth.  While some have been named as solely unconventional, other Central Banks of developed economies have had to take policy one step further into the unknown.  Sweden in particular has had to experiment with more extreme measures in an effort to keep the Scandinavian economy insulated amid a downturn in global trade.  Although the advanced economy continues to hum along as evidenced by 3.30% annualized growth, Sweden is not without its own headwinds in a reflection of slowing fundamentals domestically.

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The Fundamental Picture

On the whole, Sweden offers a mixed export economy that has managed to remain fairly stable during a period of increased global instability when it comes to trade.  However, like most developed economies, Sweden has felt the impact of creeping deflation over the past year, with the annualized rate of inflation at a mere 0.10%.  In-line with most global peers, producer prices have slipped, contracting by -1.40% over the prior year.  The Riksbank has taken a highly accommodative stance since 2011, with the end of the calendar year begin a wave of rate cuts aimed at fighting deflation and restoring GDP growth.  While monetary policy has been positive on the GDP growth front, it has been negative in other areas, namely inflation which has barely nudged to the upside.  Since the last hike, interest rates have fallen from 2.00% to -0.35% over the past 4 years in a growing sign policymakers are running short of tools.

While Swedish unemployment and growth may be lauded as the strong impact of monetary policy measures, the growing trade deficit shows just how ineffective negative interest rate policies are at fighting a downturn in global trade.  As an export economy, keeping the currency competitive was an imperative of the Central Bank and outright devaluation a tough pill to swallow amongst policymakers.  The easiest way to influence exchange rate policy is often through the implementation of monetary policy tools.  However, negative interest rates combined with quantitative easing do not necessarily always yield perfect results as evidenced by the current state of the real economy.  Despite interest rates in negative territory punishing savers, borrowing rates have surprising risen even though quantitative easing should theoretically pressure rates lower.  The broader impact of these policies has largely been the destruction of the Swedish Krona which has lost nearly 35% versus the dollar in the last two years.

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