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INTEREST RATE

Sweden cuts key interest rate to new record low

UPDATED: Sweden's central bank (the Riksbank) has slashed its key interest rate, the repo, to new record negative levels just over a month after it announced a similar move.

Published: 18 March 2015 13:53 CET
Sweden cuts key interest rate to new record low
Swedish bank notes. Photo: Anders Wiklund/SCANPIX

"The Executive Board of the Riksbank has decided to make monetary policy even more expansionary by cutting the repo rate by 0.15 percentage points to -0.25 percent and buying government bonds for 30 billion kronor, to support the upturn in inflation," the central bank said in a statement on Wednesday.

Riksbank chiefs said  that recent appreciation of the krona risks breaking a positive trend of rising inflation and added that the central bank had therefore decided to make monetary policy even more expansionary by cutting the repo rate yet again.

"This is surprising," Torbjörn Isaksson, macro economist at Swedish banking giant Nordea, told news wire TT.

"But the Riksbank has decided to keep the krona weak and does not settle for the rise in inflation we have had," he added.

The unexpected decision, which will apply from March 25th, follows the bank's move on February 11th to cut the repo to -0.1 percent, the first time in history there had been a negative interest rate in Sweden.

The central bank added in Wednesday's statement: "The repo rate is expected to remain at -0.25 percent at least until the second half of 2016. After that, it is expected to rise gradually."

Negative rates work differently to positive interest ones when borrowers pay money lenders an interest rate, usually an annual percentage on the total amount of money borrowed. Meanwhile savers putting money into a bank can normally expect to earn interest on that cash.
 
When interest rates are negative, this relationship is reversed, so lenders – i.e. banks – have to pay to lend money or to make an investment.
 
The basic idea behind negative rates is to stop organisations or people from making risky investments or transactions that could impact on the wider economy.
 
The surprise decision could put increased pressure on a property market already under strain, Tor Borg, chief economist at Swedish mortgage firm SBAB, told TT.
 
"It remains to be seen how the market reacts, but I don't think it will have a great effect on property interest rates. Partly because it is still a small decrease, partly because property interests are already at very low levels."
 
"[But property prices] could end up going up some more, even though their interest rate is not affected. There is already a lof of activity on the property market, but there could be a psychological effect that causes the prices to rise even more," he said.
 
Wednesday afternoon's move came just hours after a new survey showed that Swedes were feeling more optimistic about their personal finances, although their confidence had yet to translate into increased consumption.
 
"It appears that the interest weapon which was supposed to get the ball rolling and increase consumption has not worked. We see that families prioritize savings and investment," Jeanette Hauff, Skandia behavioural economist, told Swedish news agency TT.
 
In February the krona hit its weakest level since the financial crisis. It has since recuperated slightly, with 9.1706 kronor required to buy a euro on Wednesday, compared to 9.6835 kronor a month ago.

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MONEY

How to protect your Swedish savings when the stock market tumbles

Recent stock market developments have made consumers in Sweden worried about the savings they have invested in the market.

Published: 5 August 2024 14:44 CEST
How to protect your Swedish savings when the stock market tumbles

Stock market volatility can be unsettling, especially when it hits close to home.

On Monday, the Stockholm stock exchange mirrored global market turmoil, with the OMXS index dropping 4.8 percent in morning trading. By 11 am, there was a slight recovery, but the index remained 2.6 percent down.

READ MORE: Stockholm stock exchange opens in the red amid global market jitters

Big names in Swedish industry weren’t spared: Boliden, a major mining company, dropped 3 percent, defence giant Saab fell 1.5 percent, and engineering firm Sandvik declined by 2.6 percent. In the banking sector, SEB took a 2.4 percent hit, while Swedbank dropped 3.6 percent.

This turbulence in the Swedish market came after significant drops in Japan’s Nikkei 225 index, which experienced its most significant one-day fall since the 1987 Black Monday Crash, and similar declines in markets across South Korea, Frankfurt, London, and anticipated losses on Wall Street.

In these uncertain times, many Swedish consumers with money invested in the market wonder whether they should do something to safeguard their savings.

Avoid impulsive decisions, expert warns

Stock market volatility can raise concerns about the safety of your savings, but according to SEB household economist Américo Fernández, there’s no need to panic.

“Should they be worried? I mean, no. I would say that this is how the stock market works: there’s a lot of uncertainty and risk connected,” he told The Local. 

“When you have savings on the global stock exchanges, this will happen, especially when we’ve had at least six months of really, really good returns – maybe even too good. Then, this is a little bit expected.

“But of course, it’s always dramatic when we have such developments in the stock market in just one or two days.”

Slow and steady wins the (investment) race

For those wondering how to protect themselves against such crashes, Fernández emphasised a consistent and steady approach to investing.

“The most common thing, the best strategy for the broad masses, is to save on a monthly basis. And this is what many Swedes do; our surveys show that 9 out of 10 Swedes save on the stock market every month. This is precisely what you should do: invest in a mutual fund, which is quite common in Sweden,” he said.

“In circumstances such as these, you buy more at a lower price, instead of timing the stock market, which is almost impossible, continue your monthly investments through mutual funds. That’s a good way of diversifying your portfolio.”

READ ALSO: Will the krona’s decline stop Riksbank from cutting rates?

Ignore the alarmist headlines

The SEB household economist also advised against reacting hastily to alarming headlines.

“Another thing that households should be aware of is that when you see alarming headlines, you should sit and calmly ride the wave out.

“It’s understandable that a lot of people are affected by herd mentality when we have these negative headlines. Everyone, but especially households with tiny savings, acts and sells, and then they buy again when the headlines are positive, when the stock exchange is at high levels…

“That is the opposite of what you should do. Try to neglect these things and be cool in these circumstances, even though it seems bad and hurts your wallet. However, if it hurts your wallet too much, that might be a signal that you have too much money in the stock market (laughs), which can be common for younger investors. Although they have had it pretty good recently,” he noted.

This advice is not only applicable to Sweden but also relevant across Scandinavia, according to Fernández.

“I think it’s applicable. Across Scandinavia, all Nordic countries save a lot of money on the stock exchange, partially because the pension system isn’t fully funded by the government,” he said.

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