Five hundred percent interest rates in Sweden! Where do I sign up?In November 1992, the bank lost the battle and a managed float regimen for the currency was implemented and remains in effect to this day.
You can't. In a move to defend the Swedish krona at all cost against speculators betting on a devaluation of the currency, the Swedish central bank raised its marginal lending rate on Wednesday to a shocking 500 percent. But the rate is imposed only on banks that insist on borrowing extra funds over the next three days. Almost none did...
The aim of the operation is not to pay rates of 500 percent. It is to dramatically demonstrate the government's determination not to devalue the krona, and to drive up rates in the money market, making it more lucrative to hold the currency.
Indeed, one-month money-market rates in Sweden jumped to almost 35.00 percent on Wednesday, up from 21.32 percent late Tuesday, and well above a peak of about 25.00 percent last week.
Shortly after the Riksbank announced the 500 percent rate, domestic credit markets closed up shop for the day. "They may shut down if they want," said the chief dealer of the central bank, Kjell Nordin. "There is only a short time left for trading."
But the punitive rate, announced in the late afternoon after a boost earlier in the day to 75 percent from 20 percent failed to stop the outflow of currency from Sweden, seems to have accomplished its goal. At least for the day.
"I think this measure is sufficient for now," Bendt Dennis, Sweden's central bank governor, said in a radio interview. "The short-term speculators burned their fingers."
Darren Cullen, a Scandinavian analyst for Salomon Brothers in London, explained what happened. "This stopped the outflow of currency. They made it too expensive to short the currency." (A speculator "shorts" a currency by borrowing funds today on the hope that he can repay them later at a profit after the currency declines.)