If you are wondering who Stefan is he is our Riksbank governor his full name is Stefan Ingves he decides on the repo rate . He has been trying for a very long time to normalize the interest rate but the CPI figures haven't been supportive of his wishes :)
If you are wondering how the repo rate impacts us here are a few
There has been discussion that if the interest rates increases there would be a major impact on the housing prices and many of us who already own our homes have been concerned about development.The people who are planning of buying homes have put forward their purchase decision based on the hope that interest rates will increase during the spring and could help is getting a home at a lower price than in the beginning of the year ,but sadly the forecast for the repo rate has been revised down and indicates that the next increase will occur towards the end of the year or at the beginning of next year.
As you know in Sweden when we take Mortgage loans we can bind or fix the duration of the loans to different maturity levels between floating 3 months and upto fixed 5 years. You might have seen that the 3 months interest rates are more expensive than the 3 to 5 years fixed mortgages, you may wounder whatz the reason ? One of the reasons is that the probability of interest rates hikes in the medium term is expected to be low as there is recession fears in the next 3 to 5 years and because of that the real interest rates would be below what it is today as the growth is expected to go down so is the GDP.
Its a clever idea to divide the mortgage loans between different maturities to hedge against the impact of interest rate increases, but I haven't fixed any part of my mortgages and kept them at a 3 months floating even though I know that I would be paying less if I fixed it to 3 or 5 years. One of the reason being I have burnt my fingers in 2011 when the interest rate were increasing and in order to hedge I fixed half of the amount for 3 years and within a span of 6 months the interest rates went down and I was struck with a high interest rate for 3 years and was expensive to break it to a floating rate and was forced to pay almost 2% more than the floating for almost 2 years.
Regarding the inflation or CPI numbers the forecast says that during 2019, the rate of increase in energy prices is expected to be lower, which will contribute to a fall in inflation, with a lowest point of almost 1.5 per cent this autumn.
The interest rates in Sweden can't be seen in a isolation as the interest rates decisions by Mr.Draghi at ECB aswell as Mr.Powell at the US Fed has an impact on Stefan's decision.
In the below two graphs that compare interest rate policies of April 2016 and April 2019 you can see the interest rate trajectory is similar to what it was 3 years back which in a way is helpful as the interest on home loans didn't go up.
One of the main reason as you can observe that the CPI too are almost similar between April 2016 and April 2019 and in 2016 they had projected 3% inflation and in 2019 its projected to 2%
Source : Sveriges Riksbank
Exchange rate between SEK/INR :Normally when the interest rates aren't raised the currency becomes weak that is what happened between SEK and INR on the 25th April because of the rate decision.
We will see how the CPI and GDP numbers will impact on the next collective agreement negotiations.
The more dovish Powell , Dragi and Stefan are the better for the stock market !!
If you are wondering how the repo rate impacts us here are a few
- Interest rate on Mortgages (which has a huge impact on monthly finances)
- Interest rates on Saving which is currently non-existent in majority of the banks other than a few niche banks that give 1% interest per annum.
- Exchange rate with INR as the interest rates decides on how strong the SEK is and that will have an impact on our remittances back home.
- Our Yearly salary increment rates that are negotiated by the unions.
- Most importantly it makes sense to take risk and invest in Stock market as against the safer government bond or debt instruments.
There has been discussion that if the interest rates increases there would be a major impact on the housing prices and many of us who already own our homes have been concerned about development.The people who are planning of buying homes have put forward their purchase decision based on the hope that interest rates will increase during the spring and could help is getting a home at a lower price than in the beginning of the year ,but sadly the forecast for the repo rate has been revised down and indicates that the next increase will occur towards the end of the year or at the beginning of next year.
As you know in Sweden when we take Mortgage loans we can bind or fix the duration of the loans to different maturity levels between floating 3 months and upto fixed 5 years. You might have seen that the 3 months interest rates are more expensive than the 3 to 5 years fixed mortgages, you may wounder whatz the reason ? One of the reasons is that the probability of interest rates hikes in the medium term is expected to be low as there is recession fears in the next 3 to 5 years and because of that the real interest rates would be below what it is today as the growth is expected to go down so is the GDP.
Its a clever idea to divide the mortgage loans between different maturities to hedge against the impact of interest rate increases, but I haven't fixed any part of my mortgages and kept them at a 3 months floating even though I know that I would be paying less if I fixed it to 3 or 5 years. One of the reason being I have burnt my fingers in 2011 when the interest rate were increasing and in order to hedge I fixed half of the amount for 3 years and within a span of 6 months the interest rates went down and I was struck with a high interest rate for 3 years and was expensive to break it to a floating rate and was forced to pay almost 2% more than the floating for almost 2 years.
Regarding the inflation or CPI numbers the forecast says that during 2019, the rate of increase in energy prices is expected to be lower, which will contribute to a fall in inflation, with a lowest point of almost 1.5 per cent this autumn.
The interest rates in Sweden can't be seen in a isolation as the interest rates decisions by Mr.Draghi at ECB aswell as Mr.Powell at the US Fed has an impact on Stefan's decision.
In the below two graphs that compare interest rate policies of April 2016 and April 2019 you can see the interest rate trajectory is similar to what it was 3 years back which in a way is helpful as the interest on home loans didn't go up.
One of the main reason as you can observe that the CPI too are almost similar between April 2016 and April 2019 and in 2016 they had projected 3% inflation and in 2019 its projected to 2%
Source : Sveriges Riksbank
Exchange rate between SEK/INR :Normally when the interest rates aren't raised the currency becomes weak that is what happened between SEK and INR on the 25th April because of the rate decision.
We will see how the CPI and GDP numbers will impact on the next collective agreement negotiations.
The more dovish Powell , Dragi and Stefan are the better for the stock market !!
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