How to take advantage of the Personal Bank’s interest rate decision

Are you aware of how the Personal Bank’s decision to lower the repo rate will affect your personal finances? Bahandi gives you tips on how to take advantage of this interest rate cut and also what to avoid with it.

Why did the Personal Bank lower the repo rate?

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As is well known, the Personal Bank lowered the repo rate by 0.5 percentage points on Thursday, July 3. The decision to lower the repo rate from 0.75% to 0.25% is based on the fact that inflation in Sweden is currently too low. The inflation target is 2% and the Personal Bank believes that this can be achieved at the beginning of 2016, as consumption will increase as a result of low interest rates.

However, many are surprised by the fact that the Personal Bank lowered the repo rate as much as they did, and this shows, among other things, that the earlier inflation forecasts were quite misleading. It is also noteworthy that the Governor, Stefan Ingves, and Deputy Governor, Kerstin af Jochnick, were against the decision to lower the repo rate so low.

“The Personal Bank is reducing much more than expected,” says Mikael Sarwe, Head of Strategy at Nordea.

What are the effects of the low interest rate?

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The Personal Bank’s decision to lower the repo rate has a major impact on the private finances of most people in Sweden today. The first thing you think about is the likelihood that mortgage rates will also follow that curve. That is also true, but there are more effects of lowering the repo rate, or the policy rate it is also called.

Mortgage rates are falling
When the Personal Bank lowers the policy rate, it becomes cheaper for the major banks to borrow money themselves, since the policy rate is the interest rate that the banks pay to borrow money. When banks lend money at a lower interest rate, they in turn also lower mortgage rates to Swedish consumers.

Housing prices are being raised
On the other hand, when mortgage rates fall, housing prices are raised. As the demand for borrowing money increases as it will now become cheaper to borrow, housing prices are also being increased as more and more people are now prepared to pay more for the home.

More money left over for the mortgaged households
Since the policy rate is lowered, your monthly costs also fall, provided you have not tied up your mortgage. If you have a variable interest rate on your home loan, you will now receive more money each month, which is the very purpose of the Personal Bank’s decision to lower the policy rate to get consumption going, thus increasing inflation.

The value of funds and shares is increasing
Lowering the repo rate not only means that you borrow money at a lower interest rate, but also that you get a lower interest rate when you save money in savings accounts with the banks. This, in turn, increases the demand for riskier savings in the form of shares and funds, which the Stockholm Stock Exchange proved when the OMX index went up by 1% immediately following the Personal Bank’s announcement that the repo rate was lowered.

The krona is getting weaker
As a direct effect of the repo rate being lowered, the value of the krona also weakened up to SEK 0.20 against both the euro and the dollar, and it is likely to continue in that direction. When the value of the krone is lowered, Swedish goods become cheaper for foreign companies to purchase, which will increase net exports.

Here’s how to take advantage of the repo rate cut  

Negotiate your home loan

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Assuming your home loan is flexible, it is now highly relevant that you negotiate your interest rate down. Whatever your interest rate today, it is definitely worth trying to negotiate and bargain for better loan terms. If you are a good customer in the eyes of the banks, you can expect to negotiate down the floating interest rate to below 2% with a good margin.

If you are not satisfied with the interest rate your bank offers you, it is worth looking at other alternatives, as there are plenty of banks that are guaranteed to get you as a customer. Also, do not forget that the banks are fully aware and prepared that most of their customers are negotiating down their floating mortgage loans now in connection with the repo rate cut.

Travel within Sweden’s borders
The Personal Bank’s hope, with the decision of lowering the repo rate, is that the Swedes will start consuming more, obviously within Sweden’s borders. So it is also likely that more Swedes will receive more money when interest costs fall, but that is not the only reason why consumption in Sweden will increase.

As the value of the krona is reduced, it will be more expensive to travel abroad. Both the euro and the dollar went up by about SEK 0.20 against the krona immediately following the Personal Bank’s interest rate announcement, and much indicates that the other currencies are going up more than that as the krona weaken. It can therefore clearly be worthwhile to vacation in Sweden instead from an economic perspective.

Invest right
As mentioned earlier, the interest rate is not only lowered to borrow money, but also to save money in interest savings accounts with the banks. You should therefore look around for other options to save your money on if you are currently saving in interest savings accounts.

Instead, you can save your money in mutual funds and stocks where the return (and even the risk) is much higher. It is important that you find a way to save that gives you a higher return than the banks’ savings accounts offer. This way you can build up a buffer that you can repay on your loan when the Personal Bank raises the repo rate again.

Avoid overcharging yourself
Keep in mind that the purpose of the Personal Bank’s reduction in the repo rate is to increase consumption so that inflation approaches 2%. That target is expected to be reached by the end of 2015 and as a result, the Personal Bank will once again raise the repo rate and your home loan will immediately become more expensive. Therefore, be careful not to overcharge yourself.

If you are going to buy a home now, it is not recommended that you count on the low interest rate you have today when you calculate your monthly costs. See today’s low interest rate as a bonus instead and take advantage of it by saving the money left over so that you can in the future repay your mortgage when the Personal Bank raises the repo rate.

Summary

The fact that the Personal Bank lowered the repo rate probably did not come as a shock to any of the most experienced economists. However, the decision meant a reduction from 0.75% to 0.25% caused most to raise their eyebrows. As you know, the repo rate will not always be this low. In the long run, the Personal Bank will raise the key interest rate and if you have just over-lent it can have drastic consequences for your personal finances.