The many years of falling interest rates have been a direct result of the Swedish central bank’s (Riksbank) persistent pursuit of 2% inflation.
Thomas Franzén, former Deputy Governor of the Riksbank and the creator of the inflation target, admits, however, that it was merely a rough estimate that was “not very scientifically grounded”.
For decades, the Riksbank’s 2% inflation target has guided Swedish interest rates, and when inflation has fallen below this level, interest rates have also been repeatedly lowered in the hope of stimulating consumption – leading to Sweden having some of the lowest interest rates in the world for long periods.
However, in the Swedish national television documentary Skuldfeber, Thomas Franzén, who was behind the case, says that this was in fact developed very quickly and lightly, and that he is surprised that it is still considered “an eternal truth”.
– We had to come up with an inflation target that was credible. But it wasn’t very scientifically grounded, he says.
– We didn’t think it was an eternal truth. But this belief in 2% became more and more intense as time went on. So even now, 30 years later, people say that two percent is the way to go, Franzén continues.
Heavily indebted Swedes
Swedish households are also among the most indebted in the world – largely because long periods of low interest rates have made it relatively cheap to borrow money.
– The money has really only been used to buy homes. A home does not provide the return that a business investment does, says Fredrik NG Andersson, associate professor of economics in the documentary.
Thomas Franzén believes that the Riksbank and other central banks have acted irresponsibly in their constant pursuit of low interest rates, and that it is time for them to admit their mistakes and promise not to make them again.
– But it is difficult. There are also a lot of people who would lose face if they reassessed this.
“Need a clear direction”
When asked why Sweden is so firmly aimed at an inflation rate of exactly two percent, even though nothing definitively indicates that this is the optimal level, Riksbank Governor Stefan Ingves responds that it’s about getting the Swedish people on board.
– When you have to convince a lot of people, you need a clear direction. It doesn’t work in a society to get up every morning and say, ’I have no idea where we are going. That’s a poor strategy.