Forecast interest rate 2022

On 4 May 2022, the Riksbank announced that the key interest rate will be raised on the grounds that future expected inflation is estimated to be above the inflation target of 2 per cent. It started with a rise of 0.25 percentage points to 0.25 per cent. This meant that for the first time since 2014, the key interest rate had been above 0 per cent. However, there is little indication that the key interest rate will stay at 0.25. The Riksbank's interest rate forecast shows that the interest rate will gradually increase until it reaches a level of 2 per cent in 2024. If each rate increase is carried out by the same number of percentage points each time, we should be able to expect 7 rate rises before reaching a key rate of 2 per cent.

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What is policy rate?

The policy rate, formerly known as the repo rate, is the rate at which banks can borrow money from the Riksbank. In other words, the key rate determines the cost of borrowing for banks. Naturally, therefore, a higher key interest rate makes it more expensive for companies and individuals to borrow, as banks themselves pay more for the money they can lend.

Why is the interest rate raised in the event of inflation?

In Sweden, we use monetary policy to control the economy. The cornerstone of the monetary policy model is, as the name suggests, about controlling the amount of money in society in order to control inflation and steer the Swedish economy in the right direction. One of the Riksbank's main tasks is therefore to maintain a fixed monetary value, which it does by maintaining a low and stable inflation rate. In explicit terms, the target is for the inflation rate, as measured by change in the consumer price index, the CPIF, to be kept around 2 percent a year. One of the most effective tools that the Riksbank has at its disposal to control inflation is by adjusting the key interest rate.

It can be simplified to say that the Riksbank uses the key interest rate as a gas or brake pedal to influence inflation and movements in the Swedish economy. Based primarily on future expectations regarding the development of inflation, the Swedish and international economic situation is continuously assessed, and decisions are made on the key interest rate.

If the Riksbank assesses that the future inflation trend exceeds the inflation target and that the economy will be overheated, where the value of money today is lower than it is tomorrow, it presses the brake pedal and raises the key interest rate. This will have a dampening or cooling effect on the economy, as higher key interest rates make it more expensive for banks to borrow money, which in turn makes it more expensive for businesses and individuals to borrow. This means that the willingness to invest in society will decrease. More people will prize saving over spending, leaving a lower proportion of money in the economic circulation, which in turn causes inflation to slow and tip downward.

Should the situation be the opposite, that the Riksbank considers that the future inflation trend is too low, it would instead lower the key interest rate in order to increase the willingness to invest and thus also drive up inflation. In other words, you work countercyclically, in the opposite direction to the current economic cycle, to try to keep inflation in check. This is why interest rates are raised in the event of inflation.

Why are interest rates being raised right now?

It is precisely for the reasons we were talking about, that inflation is judged to be too high if the policy rate is not adjusted. But pointing out the exact reasons behind why inflation is too high is not straightforward, as inflation rates are affected and are part of fairly complex macroeconomic movements and shifts. In contrast, there are three overarching reasons why inflation has risen.

First of all, it is a reaction to the monetary policy measures introduced after the financial crisis of 2008/2009. The Riksbank then cut the key interest rate sharply, and since then we have had very low interest rates to stimulate the Swedish economy, leading to natural inflation. The coronavirus pandemic has also contributed to today's high inflation. Many companies had to reduce their production volumes and thus could not meet market demand, leading to rising prices and higher inflation. Even in the wake of the pandemic, the same trend has continued, as the rapid opening of the economy and subsequent high demand led to production companies not having time to produce at the rate demanded by the market. And, once supply began to catch up with demand, Russia shocked the outside world by invading Ukraine. Again, production and supply chains were severely affected, while electricity prices skyrocketed, which in aggregate led to even more price increases that in turn pushed inflation upwards.

As an individual, how will I be affected by higher interest rates?

As an individual, you are primarily affected by rising interest rates in the sense that your loans will be more expensive to pay. The largest loans we have as individuals are often our mortgages, which will see higher interest rates regardless of the term of the bond when the policy rate is raised. In other words, housing costs will increase for you as an individual, and you may need to review your finances and spending habits to cope with the higher interest rates.

However, you don't have to hang your lips fully yet. Adjusting inflation with higher key interest rates is rarely something that happens overnight. The time horizon for monetary policy measures is usually quite long, and it is therefore not impossible that, for some time, before interest rate rises take hold and have a real impact, we will see high inflation with relatively low interest rates. In times of high inflation, the best way to “protect” one's money from being eaten up by inflation is usually to own real capital and fixed assets such as housing, as these are not as sensitive to inflation.

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How will my business be affected by rising interest rates?

For most companies, the direct impact of rising interest rates will be relatively limited. It depends, of course, on the extent of the company's loan and interest costs. But in general, companies, especially SMEs, have very little and low interest costs. The exception is companies in the real estate industry, which may see greater negative effects on the result of increased interest costs.

On the other hand, companies are indirectly affected by rising interest rates, as higher interest rates mean that households' purchasing power decreases, which negatively affects sales. It can therefore be useful to take this into account now as you plan for the future.

Worried about the new interest rate situation?

Do you feel worried about how the new interest rate situation will affect your company in the future? Or do you just want someone to brainstorm ideas about how to think about the interest rate situation and its implications for your business? In addition to being experts in accounting, we at Saldo have extensive experience in business development and profitability. We are happy to provide advice, support and new ideas on how to tackle the new interest rate situation in the best way. Hit us a signal, or pull an email away, and we'll take it from there.