By Caitlin Ostroff 

Sweden, unlike most of the rest of the slow-growth world, has had enough of negative interest rates.

Next month, its central bank is expected to unwind them -- among the first of those that dabbled in the unorthodox stimulus measure in recent years to do so. But investors see other factors that will keep the country's downtrodden currency, the krona, one of the worst performing in the world, from staging a comeback.

Central bankers in the Scandinavian country, home to Volvo vehicles, Ericsson telecom equipment and H&M apparel, signaled last month that they plan to raise its benchmark interest rate next month to 0%, from minus 0.25%, citing concerns that keeping them negative any longer could lead to distortions in the financial system.

The move would have Sweden increasingly at odds with other central banks. The European Central Bank lowered rates further into subzero territory in recent months. Switzerland, Japan and Denmark also maintain negative policy rates. And while still solidly in positive territory, the U.S. Federal Reserve has cut rates three times this year.

The krona has fallen more against the dollar than other major economies' currencies in the last two years, down roughly 15% against the U.S. dollar since the end of 2017. But it didn't receive a boost when the Riksbank flagged the impending end of negative rates in October. Higher rates tend to attract money into an economy, boosting its exchange rate.

After the Riksbank flagged the rate increase at a meeting in late October, the krona briefly gained 0.8% against the dollar and the euro before losing strength by the day's end.

One key reason: Negative rates might not matter as much as people think. What is more important is that the Riksbank will continue to engage in bond purchases, a form of quantitative easing.

"QE is the most potent weapon," said Andreas Steno Larsen, senior global strategist at Nordea.

The Riksbank said in April it will continue purchasing government bonds through December 2020.

Another factor for krona weakness is Sweden's dependence on global trade. Its manufacturing sector -- like that of the U.S. and Germany -- has been hard-hit by global trade tensions. Its overall growth fell to just 0.1% on a seasonally adjusted basis in the first and second quarters of the year, compared with 1.3% in the fourth quarter of 2018.

"For the currency to see a turnaround, you need to see a turnaround in global growth and the trade outlook," said Petr Krpata, chief foreign exchange analyst for Europe, the Middle East and Africa at ING Bank.

The expected rate increase hasn't piqued the interest of currency strategists, whose median forecast is for the krona to weaken slightly against the dollar by the end of the year, according to a Refinitiv poll. One U.S. dollar buys 9.7 krona.

Sweden is also heavily export dependent so a weaker currency should have benefited the economy. One factor in Sweden's decision to institute a negative deposit rate on banks in 2014 was to keep the currency from strengthening.

There is a sense in Sweden, however, that negative rates haven't given the economy the boost expected. And central bankers have felt that persistently low rates could create perverse incentives, such as too much borrowing by households and asset price inflation. Policy makers began raising rates in December 2018, taking the benchmark to minus 0.25% from minus 0.5%.

The central bank's deposit rate, or what it charges commercial banks to hold money at the central bank, is expected to remain slightly negative, rising from minus 35 basis points to minus 10 basis points, said Olle Holmgren, an economist at SEB Bank. Though still negative, he said it would have a negligible effect on monetary policy.

Swedish stock market, meanwhile, has risen smartly this year -- in local currency terms. The OMX Stockholm 30 index, which includes H&M owner Hennes & Mauritz AB, appliance maker Electrolux and truck and industrial equipment maker Volvo AB, is up 25% and 6% over the past month. But priced in euros or dollars, as international investors approach the market, Sweden has lagged behind both the S&P 500 and the Stoxx Europe 600.

Write to Caitlin Ostroff at caitlin.ostroff@wsj.com

(END) Dow Jones Newswires

November 13, 2019 08:14 ET (13:14 GMT)

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