Yesterday, the bank decided that the repo rate would again remain at -0.5 per cent. It is the same decision they have made on several occasions before. It seems that the old plan is still being followed and that one wants to raise the first time in the middle of next year.
It is quite quiet when it comes to the repo rate
No surprises and definitely no stress from the bank, as they stay calm and keep the repo rate at the same low level. Their major goal is to keep inflation at the level that has been their target for a long time – namely 2 percent. In the past it has been a little difficult to reach up to 2 percent, but they are now very close.
Even though they are close to their target, they still do not want to start raising interest rates, because they are afraid that they can then destroy the development of inflation so that it does not stay where it should. The reason for their actions is that they are, firstly, because it has required so much support from monetary policy in the past to raise inflation and secondly that it is a fairly dampened inflationary pressure internationally, with expansionary monetary policy abroad.
In summary, it can be said that the bank wants to take the safe before the uncertain and not destroy what they have so slowly built up. Some are certainly clearly tired of the negative repo rate and think it is no longer needed or does any major benefit but although this may be true to a large extent, it is not just that it is negative or positive which is the big thing without it is about the raises themselves.
Each increase in the interest rate can affect the country’s economy in different ways, for example by affecting the housing market, the economy and inflation, so you cannot raise the interest rate anyway. Often you want to at least warn in advance that raises are on the way so that the market is not shocked. As the bank follows its plan very closely, there will be no surprises that could adversely affect the market.
When is the interest rate actually raised?
The bank’s own forecast says that the repo rate will be raised for the first time in mid-2018, and then we may not see any major increase. Perhaps the interest rate will then be -0.4 percent. The increases will then come at a slow pace. In the fourth quarter of 2018, we aim to have an interest rate of -0.27 percent.
In 2019, the plan is to slowly raise interest rates above zero and get a positive repo rate for the first time in several years. In the fourth quarter of 2019, the forecast says that interest rates will be 0.24 percent, which is still not very much. So we can expect slow and small increases that work upwards. The next few years will probably not present any major hazards in this area.
How does it affect my finances?
What you should consider, however, is not only what the repo rate is, but also how much it increases in percentage, since it is so closely linked to the mortgage rate. It is quite important for us where the mortgage rate falls as it affects our housing costs every month.
If we assume that the interest rate goes from -0.5 (as it is now) to 0 percent sometime in the beginning of 2019, then this is an increase of the interest rate by about 0.5 percent. That does not sound like much, but if you consider that today the mortgage rate is about 1.5 per cent on average, and that this interest rate also increases in line with the repo rate, then the interest rate on the mortgage can be at 2 per cent in about a year.
It is still a low interest rate of course, but the interesting thing is the percentage increase. The interest rate has then gone up by about 25 percent compared to the current level. This also means that interest costs will go up by 25 percent. If you have a mortgage loan of SEK 2.5 million, this means that you have to pay SEK 4,167 per month instead of SEK 3,125. In pure money, therefore, a little more than SEK 1,000 a month extra to pay.
This means that even if the rate hike itself is small, there will be a noticeable increase for you in your expenses and it is something to keep in mind and plan for so that you will not be surprised when it becomes reality. It is important that you try to save money now that the interest rate is low so that you have a buffer on the day when the interest rate is higher and your loan becomes more expensive.
In the longer term, of course, one can expect that the interest rate will go up even more and even this one should of course try to plan for as best it can go. Of course, you can fix your interest rate if you feel it is good. It should be borne in mind that it is not necessarily cheaper to fix the interest rate now that the bank is obviously looking ahead and setting its long-term interest rates at levels that match what they believe the interest rate will end up in the future.
It is therefore difficult to find a way to fix the interest rate when you get an unusually good deal. However, it is an alternative to consider if you want the extra security to know more exactly how much to pay each month. You can also tie up part of your loan and have a second part movable, so that you get some security at a slightly higher price and some movable and cheaper.
However, one small advantage of the repo rate starting to recover is that savings rates may finally make sense, so it is worth saving money in a savings account. Right now, there are few savings accounts that have such high interest rates that it is no idea to save money in this way. It has been much better to have the money in eg funds, although this also poses a slightly greater risk. Everyone who wants to save with very low risk or those who just happen to have a lot of money lying in the bank account can hopefully get a little better return in the future.