1957 - The interest rate coup
Without informing the Government in advance, the Riksbank raised the repo rate by an entire percentage point, from 4 to 5 per cent. The decision led to heated political debate but marked the end of the low interest rate policy.
For a period after the war, the Swedish financial system was characterised by the Government’s low interest rate policy. The aim of the low interest rates was to keep employment high and to stimulate construction. The effects of the low interest rate policy were that the economy went into overdrive and that demand for credit became very high.
Without the possibility of using the interest rate weapon to cool the economy down, the Riksbank instead introduced a number of restrictions on lending by the banks, including cash reserves of 50 per cent and a loan cap that was lowered year after year. The central government also restricted individual companies’ right to invest their own funds by introducing special investment funds in which companies’ money was held locked into accounts in the Riksbank.
In 1957, a budget deficit of SEK 900 million was recorded, at the same time as unease was spreading on the foreign exchange market. This had a negative effect on the Swedish krona. Governor Åsbrink chose to break with the low interest rate policy, raising the interest rate from 4 per cent to 5 per cent without informing the Government of the change in advance. This became known as the ’interest rate coup’. The decision had political consequences. Minister of Finance Gunnar Sträng was extremely upset and many members of the ruling Social Democratic Party demanded the resignation of Per Åsbrink as Governor of the Riksbank. Instead, Per Eckerberg, Chairman of the General Council of the Riksbank, submitted his resignation in response to the Government’s demands.
The interest rate coup entailed a clear break with the low interest rate policy and, in conjunction with the interest rate raise, the loan cap for the commercial banks was removed and the regulation of lending by the savings banks and agricultural credit associations was eased.
Housing funding was facilitated by the interest rate rise, as it became more attractive to own mortgage bonds and, over the following years, the funding of housing was prioritised ahead of other activities.
This made it possible to implement the million homes programme, but meant that other sectors found it more difficult to gain access to capital. However, detailed regulation by government authorities remained and even increased. This formed the basis of the Riksbank’s policies until the deregulation of the 1980s.