For four years (since October 2014) we have had a repo rate of 0% or lower. For the entire 20 months, the repo rate was as low as – 0.5%, it is historical. One of the reasons why we have had an extremely low policy rate during the past four years is that Sweden had extremely low inflation, which is, among other things, a sign that the economic wheels are rolling too slowly.
The Goodbank, which sets the repo rate / policy rate, thus wanted to boost the economy and inflation and today it has actually fallen above the Goodbank’s inflation target of 2%. In September, inflation was 2.5% , so now the Goodbank has warned that raising interest rates a bit cautious, either in December 2018 or February 2019. This came Governor to lead the meetings until in its monetary policy meeting October 23, 2018 , as they explained in a press release which was published today (November 2, 2018).
What does the interest rate increase mean?
The reason the Goodbank wants to raise the repo rate is because they want to prevent inflation from pulling away too much and so that the economy is not overheated. A higher repo rate means that the loan interest rates go up, which makes it more expensive to borrow, which in turn makes fewer borrowers money, and when fewer loans reduces consumption. Corporate loans are also becoming more expensive, which means that companies are taking it a bit calmer with new investments and the like. In addition, a higher policy rate makes it more profitable to save money as the savings rate is also increased. It also causes people to be tempted to save money instead of burning money, which dampens consumption and thus also inflation.
Well, the Goodbank, however, has emphasized that they will only raise the policy rate by 0.25 percentage points, which gives a policy rate of – 0.25%, to begin with. This means that we will still have a negative interest rate here in Sweden, so it will probably take time before the savings rates go up and before the loans become significantly more expensive. However, when it comes to sms loans and other fast loans , you can be quiet as they already have high interest rates and in addition there is an interest rate cap that prevents them from being so much more expensive. Probably the interest rate will not go up very much there, if at all.
This is how you prepare
Although it may take 6 months, up to a year before we get a repo rate that is at plus, it is not so stupid to already plan a little for the future and prepare for the rate hike. Therefore, at Stanley Kowalski, we will therefore give you a number of tips that will make you well prepared for future interest rate hikes.
- If you have a mortgage, it may be a good idea to tie up the loan if you haven’t already, but tie it in for at least two years as the interest rate will probably not go up that much in the near future. Today, there are many mortgage loans that have a fixed 2-year interest rate of about 2% and some have even lower rates. And there are many 5-year mortgage rates that are around 2.3%, which makes sense. It is difficult to say what a normal floating mortgage rate will look like in a few years, so you obviously cannot be sure if it pays to fix the interest rate or not.
- Start amortizing at a faster rate if you can. Whether you have a mortgage or a private loan with a variable interest rate, one thing is for sure: the interest rate will not be that much lower, but rather will go up next year, and then maybe even more the following year. This means that you will benefit from repaying your loans as soon as possible before interest rates go up.
- Once the interest rate starts to rise and the savings rate finally comes back, it is of course good to start saving money in a savings account. Then you, who do not like to invest money in stocks and funds, finally get a return on your savings.
- If you have long thought about buying something with a private loan, it may be time to do so now, before interest rates go up too much.
Focus on amortizing or saving?
As you saw in our tips, we thought it was good to both pay off their loans extra quickly and start saving money when the savings accounts finally get a savings rate to talk about again. But which one should focus most on? Amortize or save? It depends on.
Sometimes it may be better to start paying off your loans at the fastest possible rate instead of saving. For example, if you were to receive a savings rate of 1% and put aside 50,000 in a savings account, you will receive USD 500 in return, and you will also have to pay 30% in tax which means that you only earned USD 350 on your savings. If you have a mortgage that goes up by 1 percentage point over time and if you increase the interest rate by an additional USD 50,000, you earn USD 500 on it without incurring any tax, then you will instead have to deduct part of interest costs.