What to do when interest rates are high? Sweden's Riksbank increases repo rate to 4%

What to Do When Interest Rates Are High? A Guide for Swedes (2023)

From spring 2022, there’s been a sharp rise in the key interest rate in Sweden (also known as repo rate), going from 0% to an unprecedented 4%. This surge aims to elevate the costs associated with all loans, such as mortgages, consequently diminishing our purchasing power. The ultimate goal is to curb inflation. For numerous families and businesses, this translates to a monthly increase in loan costs by several thousands of Swedish kronor. So, you might be wondering, what to do when interest rates are high?

There are a few strategies that you could apply to make the most out of your money and protect yourself from both inflation and high mortgages and prices. The mindset here is totally different than when the repo rate is low, so let’s revisit them in this post. Let’s start!

Riksbank Increased Interest Rate To 4%

Today, Sweden’s central bank, the Riksbank, just increased another 0.25% the interest rates up to a total of 4%.

“The Riksbank’s interest rate increases and the falling energy prices have contributed to inflation starting to fall. The development is thus moving in the right direction, but the inflationary pressure in the Swedish economy is still too high. In order for inflation to fall back and stabilize around the target of 2 percent within a reasonable time, the executive board therefore decided to raise the policy rate by 0.25 percentage points to 4 percent. The forecast for the policy rate shows that it may be raised further.”

Press release

What does the rate hike mean?

The central bank’s key interest rate, often known as the repo rate in Sweden, is a primary tool for controlling the country’s money supply and influencing economic activity. By adjusting this rate, the Riksbank can influence borrowing costs, spending, and investments.

  1. Inflation Control: One of the primary reasons central banks raise interest rates is to control inflation. If the economy is overheating and prices are rising too fast, a rate increase can help cool things down by making borrowing more expensive and saving more attractive.
  2. Currency Strength: Higher interest rates often attract foreign investments, which can lead to an appreciation of the country’s currency. A stronger Swedish krona might benefit consumers by making imported goods cheaper, but it can also make Swedish exports more expensive for foreign buyers.
  3. Credit Conditions: The rate increase signifies tighter credit conditions. This means borrowing money, whether it’s for buying a home or financing a business expansion, will be more expensive. Higher interest rates generally lead to lower borrowing and spending, and more saving.

Implications of the Repo Rate

For the everyday person, this change will have a more tangible and direct impact on their day-to-day financial decisions and lifestyle. Let’s explore the implications of this rate increase:

  • Higher Mortgage Costs: For those with variable-rate mortgages, the monthly payments may increase. This could strain household budgets, especially for those already living close to their means.
  • Savings Accounts Yield: On the bright side, savers might see a slight increase in the interest they earn on their savings accounts. This could incentivize more people to save or increase their existing savings rate.
  • Credit Card and Loan Rates: Credit card interest rates might rise, making it more expensive to carry a balance from month to month. Similarly, personal loans and auto loans could come with higher interest rates, increasing the total repayment amount over time.
  • Consumer Spending: As borrowing becomes more expensive and saving becomes more attractive, some individuals might reduce discretionary spending. This can influence sectors like retail, entertainment, and tourism, potentially leading to sales, discounts, or special offers as businesses compete for consumers.
  • Housing Market Dynamics: The increased costs of borrowing might lead to a slowdown in the housing market, with fewer people taking out new mortgages. This could stabilize or even decrease house prices in some areas.
  • Auto Purchases: Higher interest rates could make financing a new car more expensive, possibly leading to a decline in new car sales. On the flip side, the used car market might see a boost.
  • Travel and Vacation: With the potential appreciation of the Swedish krona due to higher interest rates, international travel could become cheaper for Swedes. However, those on a tighter budget might decide to postpone or reduce their travel plans because of the broader economic implications.
  • Investment Consideration: Everyday investors might reconsider their strategies. With the potential for bonds to decrease in value with rising rates, some might shift their focus to stocks or alternative investments.
  • Retirement Planning: Those approaching retirement might be more cautious with their investments, considering the potential market volatility with rate changes. An increased savings rate might also impact when and how individuals decide to retire.
  • Consumer Confidence: Perception plays a massive role in economics. If the general public sees the rate increase as a sign of economic instability or a forthcoming recession, consumer confidence might drop, leading to reduced spending and a more cautious approach to finances overall.

What to do when interest rates are high?

1. Re-evaluate Your Debt

If you have variable-rate loans or credit card debt, the cost of your debt might increase. Consider:

  • Refinancing your mortgage: Talk to your bank manager, or look for moving your loan to another bank. Might be also worth checking if it’s bettter to lock in a fixed rate.
  • Paying off high-interest debts: Focus on clearing debts with the highest interest rates first. For example, don’t accumulate debt in credit cards, pay them in full.
  • Avoiding new high-interest debt: This isn’t the best time to accumulate expensive debt.

Pro Tip

I switched my mortgage (bolån) and savings from Nordea to Avanza to get a 1% reduction in my interest rate. Before you do it, also check your credit score, the better your score, the better deals you can get.

Mortgages in Sweden: what to do with high interests

2. Boost Your Savings

Higher interest rates often mean better yields on savings accounts and fixed deposits. Consider diverting more of your income into these instruments to benefit from the improved returns.

Pro Tip

Open a high-yield savings account and put your savings in there to get up to 5% interest. I have Avanza, but I write about many others here.

Avanza Sparkonto: one of the best savings accounts in Sweden (2023)

3. Reassess Investment Strategies

Bonds typically fall in price when interest rates rise. It might be prudent to:

  • Diversify your portfolio: Ensure you have a mix of stocks, bonds, and other asset classes.
  • Consult with a financial advisor: Get professional advice tailored to your situation.

Pro Tip

The easiest and most complete investment platform in Sweden for me is Avanza. But I also have Revolut to buy stocks, funds and even crypto in a very easy way.

4. Consider Fixed Income Opportunities

While existing bonds might decrease in value, new bonds issued in a high-interest environment will offer better yields. Look for secure and high-yielding bond opportunities.

5. Limit Big Purchases

With higher interest rates, financing big-ticket items like cars or luxury goods can become pricier. It might be wise to postpone such purchases or explore alternative financing options.

6. Split bills Interest-Free

Several credit cards let you split bills into multiple months with no interest. For example, the Bank Norwegian Credit Card, and others.

Pro Tip

Splitting bills into multiple months with no interest let you win inflation easily! I use the Bank Norwegian Visa and Coop Mastercard Mer.

Bank Norwegian Sparkonto (2023)

7. Take advantage of Rewards

Several debit and credit cards offer you cashback or points on every purchase. You can get money back every time you spend or even use those points later for experiences such as free flights, travel, and accommodation.

My favorite choices:

8. Review Property Decisions

If you’re looking to buy a house:

  • Negotiate better prices: Sellers might be more willing to negotiate in a high-interest environment where fewer buyers are taking out mortgages.
  • Consider renting: Renting might be a safer short-term option if the housing market looks unstable.

9. Budget Wisely

High-interest rates can strain personal finances. It’s an excellent time to review your budget, cut unnecessary expenses, and prioritize savings and investments.

Time to revisit things such as electricity, phone subscriptions, broadband, insurance, etc. Check these posts:

10. Stay Calm and Strategize

Economic cycles are a natural occurrence. While high-interest periods pose challenges, they also offer opportunities. Instead of panicking, focus on adapting your financial strategies.

The Riksbank’s decisions, government policies, and global economic trends can all impact the direction of interest rates in Sweden. Regularly tune into financial news to stay updated.

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