How does the Riksbank control interest rates?
In July 2010, the Executive Board of the Riksbank decided to raise the repo rate to 0.50 per cent. Consequently, it was also decided that the deposit rate and the lending rate should return to the levels that prevailed before the financial crisis began in the autumn of 2008. 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 borrow 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 design of the interest-rate corridor makes it more profitable for the banks to borrow from each other than to turn to the Riksbank. This is because they get a higher interest rate, or pay less, when they borrow from each other.
At the monetary policy meeting in July, it was decided that the deposit and lending rates would once again be 0.75 percentage points lower and higher, respectively, than the repo rate. The deposit rate will therefore continue to be negative (-0.25 per cent). A negative deposit rate means that the banks must pay if they want to deposit money with the Riksbank.
In practice, the deposit and lending rates have very little impact on what the overnight rate will be, partly because the interest-rate corridor makes it profitable for the banks to borrow from each other and partly because the Riksbank is prepared to carry out so-called fine-tuning transactions every day. As a result, the overnight rate is kept inside a band that is narrower than the interest-rate corridor and 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. In addition, the Riksbank is prepared to carry out daily fine-tuning transactions with the banks if there is an imbalance in the banking system's liquidity in relation to the Riksbank at the end of the day. In these fine-tuning transactions the Riksbank either 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, in the event of a shortage of liquidity, 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?
A year ago, the Riksbank began lending large sums in kronor to the Swedish banks. These loans have begun to mature, but there is still ample liquidity in the banking system. This means that the Riksbank draws in large sums in the weekly issues of Riksbank certificates and in the daily fine-tuning transactions. For example, on 7 July the Riksbank drew in SEK 170 billion from the issue of Riksbank certificates at an interest rate of 0.50 per cent, while the banking system deposited SEK 78 billion in fine-tuning transactions at an interest rate of 0.40 per cent. On the same day, the banking system deposited only SEK 16 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.