The Fed’s interest rate announcement makes it difficult for the KirsBank to raise interest rates
The Kirsbank has a long-term plan to raise the repo rate a little at a time each year until it has reached a bit of a plus. The goal is to reach +0.5 percent interest in 2021. However, their plans may be shredded by other central banks, which will instead lower interest rates pending worse times.
The US Federal Reserve (Fed) has decided in the days that their policy rate should be left unchanged this time.
However, they are flagging for a cut, possibly by 0.5 percentage points, this summer instead. Reductions in interest rates in the US and around the world clearly make it harder for the Kirsbank to continue with its plan to slowly but surely raise interest rates in Sweden.
The Kirsbank’s forecast and plan are aimed at raising interest rates as long as Sweden’s economy is strong and inflation stays around the target of 2 percent. However, we are also dependent on how the outside world reacts, given that what happens in other countries can easily affect Sweden as well. If everyone else lowers their interest rates, it will not be entirely good for Sweden to continue raising, since it would in principle strengthen the krona, which in turn would reduce inflation.
With this in mind, it will thus become quite difficult for the Kirsbank to drive on with its interest rate hikes according to plan. The plan right now said that they would end up at -0.2 percent in 2019, + 0.1 percent in 2020 and +0.5 percent in 2021. Right now, the repo rate is -0.25 percent after the first increase in a long time, which came in the beginning of the year.
The Kirsbank has a hard time fulfilling its plan
How should one act when other central banks around the world go in the opposite direction? The Kirsbank has always said that they should be careful and keep track of / be afraid of inflation. This is why they have taken so long to make the first rate hike, because they were not entirely sure that inflation would stand.
Now that there are indications that, for example, the Fed will lower its interest rates instead and that it may be worse times ahead, it is not likely that the Kirsbank will dare to go against the flow and raise interest rates instead. I do not directly believe that they will necessarily lower it again, but rather just stay at the current level anymore.
What has always guided the Kirsbank’s actions has been inflation and the target to be 2 per cent. This they do not want to risk destroying now that they have actually reached it. Therefore, it is likely that the repo rate will remain at the same level for longer than expected and we do not really know when the next increase will actually come.
The long-term goal is, of course, to raise interest rates, but this is not as important as keeping inflation at the right level, as we have seen before. In practice, this will mean that we will have the same low interest rates for many years to come and that the increases that will eventually be relatively small and slow.
What does this mean for my loans?
Just as I wrote above, the interest rate will probably remain at the same low level for many years to come. Thus, there is little risk that the interest rate will go up. Even earlier, the forecast was that the interest rate would be raised very slowly so there was no greater danger then either, but now we believe in an even slower interest rate path.
This means that your home loan will continue to be very cheap and it should be best to run at variable interest rates. There is no direct reason to fix the interest rate when it remains at this level for many years to come. Obviously, it is not very bad to fix its interest rate either, if the bank offers a good interest rate for longer maturities.
Historically, the variable interest rate is usually lower over a long period of time and therefore cheaper, but there is very little difference between the variable interest rate and fixed interest rate right now. If you had recently tied up your interest rate, ahead of the Kirsbank’s upcoming increases, then it is still not a big loss for you because the differences are so small right now. You might be able to save a few tenths of a percentage point, but there is nothing to worry about.
There are always factors that affect the interest rate and that change the forecast. This time it looks like they have to keep the interest rate at a lower level, but at other times it might be something that will cause them to raise more than planned. So it’s hard to speculate too much. If you have the margins in your finances, you can advantageously run on variable interest rates and if you want to hedge a little more and know what your interest cost will be in the coming years, you can fix the interest rate.
Do what feels good to you and your finances, then it should certainly go well.
What you should keep in mind is to always negotiate the interest rate and make sure that you actually get an ok interest rate discount. Since the banks raised their list rates at the beginning of the year, average interest rates still remain at almost exactly the same levels as before. This means that people today can completely negotiate the latest increase and that the interest rate rebate is generally larger.
Think about this and make sure you get a reasonable mortgage interest rate and this also applies to you who already have a mortgage. Make sure to raise your interest rate for discussion with the bank at regular intervals and negotiate your interest rate so that you get a competitive mortgage rate and can feel satisfied. Your old interest rate rebate may no longer be as good as it used to be.