Interest Rate in Sweden – What Is the Policy Rate and How Does it Effect Loans?

Interest rate – or Policy rate – is a term that often appears in discussions about inflation and public economics. But what does it in fact mean, how does it affect you as a borrower, and what is the forecast? Let’s take a closer look at the policy rate and the Swedish interest rate forecast.

What Is the Policy Rate?

The policy rate is the interest rate set by Sweden’s central bank, the Riksbank. Their task is to maintain stable inflation, steady economic growth and high employment by adjusting the policy rate.

The policy rate controls how much it costs banks to borrow money. This in turn affects the interest rate you get saving or borrowing money.

The Interest Rate Affects Inflation

The Riksbank’s main objective is to maintain a low and stable 2 % inflation by either raising or lowering the policy rate. The Riksbank sets the policy rate a few times yearly. They can have it stay on the current level, raise, or lower it. Their decisions depend on the Swedish economy, the global economic situation, and on future inflation expectations.

Reasons for Raising or Lowering the Policy Rate

The policy rate is always controlled by forecasting, not by the current inflation. If inflation is looking to increase, the Riksbank can try to prevent it by raising the policy rate. If inflation is looking to decrease, they can stimulate economic activity by lowering the policy rate.

What Does a Raised Policy Rate Mean?

When the policy rate goes up, it will be more expensive to borrow money. This is because the Riksbank wants to slow down the economy and keep the inflation in check. If you have a loan with an interest rate in Sweden, your monthly cost could go up.

A High Policy Rate Is Positive for Savings

An increased policy rate can often be perceived as negative. However, the increase is good news for you as a saver, since you receive a higher interest rate in Sweden on your savings account.

Why Do Interest Rates Increase in Response to Policy Rate Adjustments?

Swedish banks can get money from the Riksbank, which they then lend to you. But when they borrow from the Riksbank, they must pay interest, just like anyone else borrowing money. This interest is based on the policy rate. If the policy rate goes up, it costs more for banks to borrow. So, they raise their own interest rates in Sweden to make up for it, aiming for their rates to be higher than the policy rate.

Why Does a Higher Interest Rate Reduce Inflation?

Increasing the policy rate has a direct impact on inflation for a few reasons. When the policy rate goes up, it becomes more expensive for individuals to borrow money from banks. This means people have less money to spend each month, leading to less purchases of goods and services. As a result, the economic activity in society slows down and inflation ultimately reduces.

How Society and Our Loans Are Affected by the Policy Rate

Changes in the policy rate directly affect society’s finances and loans. When the policy rate increases, banks raise their deposit and lending rates. And when the policy rate goes down, banks lower their interest rates accordingly.

An increased policy rate can:

•   Reduce borrowing because of higher borrowing costs
•   Provide increased monthly cost for current borrowers
•   Reduce consumption in society
•   Increase the public’s savings thanks to higher savings rates

A lowered policy rate can:

•   Promote borrowing by lowering loan interest rates.
•   Decrease monthly payments for people who already have loans.
•   Get more people to spend money by boosting general consumption

The Interest Rate and Policy Rate in Sweden Today

During the 2020 pandemic, Sweden’s policy rate dropped close to zero as the demand fell, leading to an inflation decrease. As the restrictions eased, the demand shot up, causing inflation to rise. To control this, the Riksbank started raising the rates in 2022. By autumn 2023, the rate had gone up eight times, leveling the 2008 rates during the financial crisis. This has made borrowing more expensive for people.

When Will the Interest Rates in Sweden Go Down?

The Riksbank keeps figuring out what works best to keep prices in check and closer to the 2 % annual inflation target. Lately, the inflation has been higher than that, so they’ve been taking measures like changing the policy rate, using monetary policy, and encouraging the economy to grow. They’re doing this to keep the economy steady and healthy for everyone.

In 2024, the inflation has calmed down, and the Riksbank have lowered the policy rate. The prognosis is that the policy rate will be lowered even more, resulting in lower interest rates in Sweden.

Are There Other Ways to Bring Down Inflation?

Interest rate hikes aren’t the only solution for lowering inflation. Central banks often use them

to control the economy, but there are other options too. Governments can cut spending, raise taxes, or use austerity measures to handle inflation alongside raising interest rates.

A Good Time to Review and Compare Mortgages

In times like these, it’s crucial to regularly check and compare your mortgages, especially with interest rates going up and financial uncertainty. Even slight differences in rates can lead to significant savings, so challenging the banks can really pay off.