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.
- 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.
- 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.
- 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:
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.
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.
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.
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.
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:
- Revolut gives you up to 1% cashback on every purchase (debit card). Try 3 months free Premium with this link.
- The Coop Mastercard Mer is a great credit card with a nice reward system if you buy groceries at Coop.
- Plutus (debit) reimburses you Netflix, Spotify or many other subscriptions with their Perks program. You can also get €10 after depositing your first €20.
- I use the SAS EuroBonus Mastercard and Amex to get as much EuroBonus points as possible and fly for free (even business class). Check my guides: How to make 1 Million EuroBonus Points, and my Free SAS EuroBonus Points Calculator.
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.
