This blog post is part of our Frequently Asked Legal Questions (FALQs) series.
Thirty years ago this month, on September 16, 1992, the Swedish Central Bank, Sveriges riksbank (Riksbanken), announced a 500% marginal interest rate in hopes of saving the Swedish currency from devaluation. It did not work.
This blog post addresses some of the FALQs surrounding the event.
1. What was the role of the Swedish Central Bank in the 1990s?De
The Swedish Constitution at the time provided that the Swedish Central Bank was a government agency under the Swedish Parliament. (9 ch. 12 Regeringsformen.) It could only act as stipulated in law, specifically the Riksbank Act of 1988 (Lag om Sveriges Riksbank (SS 1988:1835)). In accordance with the Riksbank Act, its main goal was to be responsible for the Swedish currency and credit policy. It was also tasked with promoting a secure and effective payment system. (4 § Lag om Sveriges Riksbank.) Moreover, the Riksbank had the monopoly on issuing money (5 § Lag om Sveriges Riksbank.)
With respect to the currency and credit policy, the Riksbank Act specifically provided that:
9 § Riksbanken shall follow the developments on the currency and credit markets and take needed monetary policy measures.
10 § Riksbanken shall decide the system that will govern the establishment of the Swedish krona’s value in relation to foreign currencies as well as how this system should be applied. (Translation by author.)
2. What led up to the adoption of the 500% marginal interest rate?
Sweden suffered a recession in the early 1990s that led to what later became known as the Swedish banking crisis, part of the Nordic banking crisis. In May of 1991, the Swedish Krona (SEK) was (unilaterally) pegged to the European Currency Unit (ECU), resulting in heavy speculation against the SEK. The Riksbank and the Swedish government tried to keep the SEK steady against the ECU to prevent an outflow of money from Sweden, refusing to devalue the currency, a strategy it had regretted using several times during the 1970s and 1980s. Following several rate hikes over the week leading up to September 16, 1992, the Riksbank announced the “ozone-busting” 500% marginal interest rate. The rate applied to overnight borrowing from the Riksbank by commercial banks.
3. What happened after?
Three days after the rate hike, a crisis package was negotiated between the government and the Social Democrats to decrease the budget deficit. The marginal rate was lowered in stages first to 50% then 24% and finally 11.5% in November 1992. On November 19, 1992, the Swedish Central bank abandoned the fixed exchange rate between the SEK and ECU and let the currency float.
Some have questioned whether there ever was a limit for how high the Swedish marginal rate could have been raised to protect the value of the SEK. Reportedly, the governor of the Riksbank at the time, Bengt Dennis, has said that the limit was 4,000%.
4. What were the lasting effects?
There were several lasting effects. First, the 2% inflation target is now expressed in law through the adoption of an amendment to the Riksbank Act that entered into force on January 1,1999. (Prop. 1997/98:40 Riksbankens ställning.)
Before the amendment the law read:
1 ch. 4 §
Riksbanken has, in accordance with 9 ch. 12 § Instrument of Government, responsibility for the currency and credit policy. It shall also promote a secure and effective payment system. (Translation by author.)
It was replaced with
The Riksbanken has, in accordance with 9 kap. 12 § Instrument of Government responsibility for the monetary policy. The goal of the Riksbank’s activity shall be to uphold a fixed monetary value. Riksbanken shall also promote a secure and effective payment system. (Translation by author.)
Additional amendments to the Riksbank Act also increased the independence of the Riksbank.
5. What laws are on the books now?
The Swedish Constitution (Regeringsformen) amended the language surrounding the role of the Swedish central bank in a 2010 amendment, and the 9 ch. 13 § Instrument of Government now reads
The Riksbank is the country’s central bank and an authority under the Riksdag. The Riksbank is responsible for monetary policy. No authority may decide how the Riksbank shall decide on matters relating to monetary policy.
The Riksbank Act has also been amended Lag om Sveriges Riksbank (SFS 1988:1385)(Consolidated).
6. What is the status of the Swedish Krona?
Sweden, together with neighboring Denmark is one of eight countries in the European Union that is currently not part of the Eurozone. While Denmark has an outright exception, meaning there is no assumption that they will ever join the European currency, Sweden has a duty to adopt the currency, just not now, but once it meets the necessary conditions. Sweden held a referendum on adopting the euro in 2003 with 55.9% voting against adoption and 42% in favor.
7. What is the Swedish policy interest today?
On September 20, 2022, the Swedish Riksbank raised the policy interest rate from 0.75% to 1.75% to fight off inflation and maintain price stability. The Riksbank also announced that it was planning to further raise the interest rate over the coming six months.
8. Where can I read more?
Riksbanken, 1992 – Interest Rate 500% – the Krona Floats
Lars Jonung, The Swedish Model for Resolving the Banking Crisis of 1991-1993. Seven Reasons Why it was Successful, European Commission, European Papers 360 (February 2009)
P, Englund, The Swedish Banking Crisis: Roots and Consequences, Oxford Review of Economic Policy, Volume 15, Issue 3, September 1999, pages 80–97.
Prop. 1997/98:164 Ändringar i lagen 1998:135 om Sveriges riksbank
Prop. 1997/98:40 Riksbankens ställning
Library of Congress Holdings
Mats Larsson & Gabriel Söderberg, Finance and the Welfare State : Banking Development and Regulatory Principles in Sweden, 1900-2015 (2017)
Stefan Ingves et. al., Lessons Learned from Previous Banking Crises : Sweden, Japan, Spain, and Mexico (2009)
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