In July, the Executive Board of the Riksbank decided to cut the repo rate to 0.25 per cent. In connection with this the Executive Board also decided to reduce the deposit rate and the lending rate. Together, these two interest rates form the so-called interest-rate corridor, which is an important component of the system the Riksbank uses to control the shortest of all interest rates, the so-called overnight rate.
What is the interest-rate corridor?
The banks can deposit money overnight with the Riksbank at the deposit rate. The lending rate is the interest rate that the banks must pay when, against collateral, they lend money overnight from the Riksbank. In this way the deposit rate forms the floor and the lending rate the ceiling for how low or how high the overnight rate can be.
The corridor is designed in such a way that it is better for the banks to borrow from each other rather than turning to the Riksbank. This is because they earn more interest or, alternatively, pay less when they borrow from each other.
At the monetary policy meeting in July, it was decided that the deposit rate and the lending rate would continue to be 0.5 percentage points lower and higher, respectively, than the repo rate. As the repo rate was cut to 0.25 per cent, this meant that the deposit rate became negative (-0.25 per cent), which means that the banks must pay if they want to deposit money with the Riksbank.
In practice, however, the deposit rate and the lending rate have very little impact on what the overnight rate will actually be, partly because the banks have more to gain from borrowing from each other and partly because the Riksbank is prepared to conduct so-called fine-tuning transactions every day. As a result, the overnight rate is kept within a narrower band than the interest-rate corridor, which contributes to clearer monetary policy signalling.
How is the overnight rate controlled?
Once a week, the Riksbank issues Riksbank certificates at an interest rate that is the same as the repo rate. The Riksbank is also prepared on a daily basis to carry out what are known as fine-tuning transactions with the banks. These fine-tuning transactions entail either that the Riksbank draws in surplus liquidity from the banks, that is the banks deposit money with the Riksbank at the repo rate minus 0.10 percentage points, or that the banks borrow money from the Riksbank, against collateral, at the repo rate plus 0.10 percentage points. As the fine-tuning transactions are conducted at the repo rate plus/minus 0.10 percentage points, this means in practice that there is a much narrower band around the repo rate than the interest-rate corridor. Consequently, the overnight rate is kept stable and close to the repo rate.
How has this worked in practice?
Over the last 12 months the Riksbank has lent large sums of money to the Swedish banks. As a result, there is ample liquidity in the banking system and the Riksbank draws in large sums from the weekly emissions of Riksbank certificates and in the daily fine-tuning operations. For example, on 23 August the Riksbank drew in SEK 130 billion from the issue of Riksbank certificates at an interest rate of 0.25 per cent, while the banking system deposited SEK 167 billion in fine-tuning transactions at an interest rate of 0.15 per cent. On the same day, the banking system deposited only SEK 34 million at the negative deposit rate (-0.25 per cent). The negative deposit rate has not affected how much money the banks have deposited with the Riksbank at the deposit rate. The control system has thus continued to work in exactly the same way as previously.