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Sweden has ended its experiment with negative interest rates, not long after RBA governor Philip Lowe said it isn't on the cards for Australia

James Hennessy

Europe may just be taking a foot off the accelerator on the negative interest rate experiment.

Sweden's central bank, Riksbank, ended five years of negative interest rates on Thursday, with the bank's governor Stefan Ingves arguing the experiment worked as planned, boosting economic activity and preventing the country from entering a period of disinflation.

"Inflation has been close to the target of 2 percent since the start of 2017, and the Riksbank assesses that conditions are good for inflation to remain close to the target going forward," the bank said.

But the bank repeated a warning it made when it first slashed rates below zero in 2015: that the "behaviour of economic agents may change and negative effects may arise”.

READ MORE: The RBA is now considering the drastic measure of negative interest rates — meaning you could be paid to borrow money from the bank

According to a report by Reuters, while the negative rates experiment in Sweden has indeed had an expansionary effect on the economy, it has also had a series of side effects. Real estate prices have boomed, and both households and business have taken on more debt – leaving the country in a somewhat precarious position.

Critics of negative interest rates – under which banks would functionally pay people to take out loans instead of charging interest – argue they keep 'zombie' firms alive artificially and hurt bank profits. The latter effect may not be motivating for anyone but the executives.

Negative interest rates remain in the eurozone, Japan, Denmark, Switzerland and Hungary, and are expected to remain in effect for some time. Sweden is considered something of a pioneer in this contentious field of unconventional monetary policy.

Australia's reserve bank has rejected the strategy

Despite flagging a willingness to explore unconventional monetary policy throughout the year, Reserve Bank governor Philip Lowe pretty firmly rejected negative interest rates in a speech in November.

Speaking to the annual dinner of the Australian Business Economists, Lowe outlined the international experience of governments experiments with unconventional policy, and how the lessons might be applied to Australia.

In short, he dismissed the applicability of negative interest rates to Australia for a number of reasons, arguing it was "not clear" the experiment had worked internationally.

"While negative rates have put downward pressure on exchange rates and long-term bond yields, they have come with other effects too," Lowe said.

"It has become increasingly apparent that negative rates create strains in parts of the banking system that can impair the ability of some banks to provide credit. Negative interest rates also create problems for pension funds that need to fund long-term liabilities. In addition, there is evidence that they can encourage households to save more and spend less, especially when people are concerned about the possibility of lower income in retirement.

"A move to negative interest rates can also damage confidence in the general economic outlook and make people more cautious."