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INTEREST RATE

Sweden cuts key interest rate to new record low

UPDATED: Sweden's central bank (the Riksbank) has slashed its key interest rate, the repo, to new record negative levels just over a month after it announced a similar move.

Published: 18 March 2015 13:53 CET
Sweden cuts key interest rate to new record low
Swedish bank notes. Photo: Anders Wiklund/SCANPIX

"The Executive Board of the Riksbank has decided to make monetary policy even more expansionary by cutting the repo rate by 0.15 percentage points to -0.25 percent and buying government bonds for 30 billion kronor, to support the upturn in inflation," the central bank said in a statement on Wednesday.

Riksbank chiefs said  that recent appreciation of the krona risks breaking a positive trend of rising inflation and added that the central bank had therefore decided to make monetary policy even more expansionary by cutting the repo rate yet again.

"This is surprising," Torbjörn Isaksson, macro economist at Swedish banking giant Nordea, told news wire TT.

"But the Riksbank has decided to keep the krona weak and does not settle for the rise in inflation we have had," he added.

The unexpected decision, which will apply from March 25th, follows the bank's move on February 11th to cut the repo to -0.1 percent, the first time in history there had been a negative interest rate in Sweden.

The central bank added in Wednesday's statement: "The repo rate is expected to remain at -0.25 percent at least until the second half of 2016. After that, it is expected to rise gradually."

Negative rates work differently to positive interest ones when borrowers pay money lenders an interest rate, usually an annual percentage on the total amount of money borrowed. Meanwhile savers putting money into a bank can normally expect to earn interest on that cash.
 
When interest rates are negative, this relationship is reversed, so lenders – i.e. banks – have to pay to lend money or to make an investment.
 
The basic idea behind negative rates is to stop organisations or people from making risky investments or transactions that could impact on the wider economy.
 
The surprise decision could put increased pressure on a property market already under strain, Tor Borg, chief economist at Swedish mortgage firm SBAB, told TT.
 
"It remains to be seen how the market reacts, but I don't think it will have a great effect on property interest rates. Partly because it is still a small decrease, partly because property interests are already at very low levels."
 
"[But property prices] could end up going up some more, even though their interest rate is not affected. There is already a lof of activity on the property market, but there could be a psychological effect that causes the prices to rise even more," he said.
 
Wednesday afternoon's move came just hours after a new survey showed that Swedes were feeling more optimistic about their personal finances, although their confidence had yet to translate into increased consumption.
 
"It appears that the interest weapon which was supposed to get the ball rolling and increase consumption has not worked. We see that families prioritize savings and investment," Jeanette Hauff, Skandia behavioural economist, told Swedish news agency TT.
 
In February the krona hit its weakest level since the financial crisis. It has since recuperated slightly, with 9.1706 kronor required to buy a euro on Wednesday, compared to 9.6835 kronor a month ago.

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MONEY

Three ways Sweden’s slashed interest rate will boost your finances

Sweden's central bank, the Riksbank, has lowered the policy rate for the first time in eight years. How could this affect the finances of those of us living in Sweden?

Published: 8 May 2024 12:01 CEST
Updated: 10 May 2024 06:00 CEST
Three ways Sweden's slashed interest rate will boost your finances

Lower mortgage rates

The policy rate is not the same as the interest rate on your mortgage, although they are linked. In a policy rate prognosis from March, the bank predicted that the policy rate could drop to as low as 2.75 percent by the end of 2025, a drop of 1.25 percentage points since the beginning of 2024.

If mortgage rates drop by the same amount, you could expect a drop in the monthly cost of a 3 million kronor mortgage of around 3,000 kronor a month, not including the tax rebate for interest costs.

Higher property prices

As mortgage rates get lower, the housing market is likely to improve, as buyers know their monthly costs aren’t going to skyrocket due to ever-rising interest rates.

If you already own a home and you’re planning on buying and selling at the same time in the market, this will affect you less, as the price of your new home will most likely go up at the same rate as the price of your old home, but this is good news for anyone planning on selling.

It’s worse news for first-time buyers, who will have to save a larger deposit as prices go up, but on the other hand they’ll get lower mortgage rates and a more stable policy rate makes it easier to plan ahead for the future without being surprised by ever-increasing rates.

A stronger Swedish economy

The Riksbank’s decision to lower the interest rate is proof that the bank believes inflation is over – for now at least. This means that we can expect to see inflation remain at a more stable level, and we’re unlikely to see anything close to the ten percent inflation we saw at the end of 2022.

Lower inflation means that Swedish monetary policy won’t need to be as cautious or restrictive in the future, as the government and the central bank no longer need to put all their efforts into fighting inflation.

That’s not to say that authorities will start stimulating the economy just yet – they’re likely to proceed with caution to make sure inflation really is down for the long-term – but Thursday’s interest rate announcement indicates that the “economic winter” Finance Minister Elisabeth Svantesson warned of in September last year could be drawing to a close.

Is it all good news?

In the short term, the value of the krona is likely to worsen somewhat, as the central bank has lowered Sweden’s interest rate ahead of other major central banks. The krona weakened slightly after the bank’s announcement on Thursday, dropping 8 öre in value against the dollar and 7 öre against the euro.

This is good news for people with income in other currencies, but bad news for those of us who are paid in kronor.

Having said that, a stronger Swedish economy is good news for the value of the krona in the long term, although it’s difficult to predict when the krona will start to gain in value and by how much.

At the end of last year, Riksbank governor Erik Thedéen described the krona as “undervalued”, and underlined the importance of having strong foundations in the Swedish economy.

“The Swedish economy is, at its foundations, well-managed, and sooner or later this will lead to a stronger exchange rate,” he said. “Sweden has strong finances, a well-educated labour force, responsible salaries and a good underlying level of competition.”

“As anyone who has tried to predict the exchange rate knows, it’s genuinely difficult to say exactly when it will go up and by how much, but it can also happen quickly when the trend is broken and the krona starts to gain in value.”

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