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Sweden’s record-low interest rate extended until mid 2018

Sweden's record-low interest rate of -0.50 percent has been extended until mid 2018, and will not change early next year as previously intended, the country's central bank has announced.

Published: 27 April 2017 09:45 CEST
Updated: 27 April 2017 12:30 CEST

Sweden's record-low interest rate extended until mid 2018

Swedish krona coins. Photo: Anders Wiklund/TT

Though economic activity in Sweden is increasingly strong, the Riksbank has judged that it will take longer than expected for inflation to stabilise at 2 percent, in part due to uncertainty over political and economic developments abroad. As such the repo rate is now not expected to be raised until later than previously forecast.

It is also still more likely that the rate will be cut than raised in the near future, the bank said.

“To support the upturn in inflation, monetary policy needs to be somewhat more expansionary. The considerable uncertainty over economic and political developments abroad is also important for the stance of monetary policy,” the Riksbank said in a statement.

“The Executive Board assesses that the repo rate needs to be held at the current low level for a quarter longer than was assumed in February. The first repo-rate increase is now expected to be made in the middle of 2018. The repo rate path also reflects the fact that there is still a greater probability of the rate being cut than of it it being raised in the near term.”

READ ALSO: Cashless Swedes sitting on old notes worth billions

The bank will also further extend its programme of purchasing government bonds by 15 billion kronor ($1.7 billion) into the second half of 2017, which will mean purchases amount to a total of 290 billion kronor ($32.9 billion) by the end of the year, excluding re-investments.

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.

IN FIGURES: How could lower interest rates affect your Swedish mortgage?

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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