That being said, it is wise to be humble. The geopolitical risks have thrown us onto a new playing field. It is not reasonable to make a forecast that the situation will escalate so much that the Riksbank feels compelled to forego a first interest rate cut in May, but it may be wise to have slightly larger margins in the current situation.
Deputy Riksbank Governor Martin Flodén, who will vote for the last time in May, indicated at an event organized by Nordea that he was comfortable with the current krone exchange rate. Riksbank governor Erik Thedéen has also expressed himself in a similar way. Nordea’s assessment is that the krona needs to weaken to 11.80 against the euro in order for the Riksbank to possibly refrain from lowering the policy rate. We are not there.
Regardless, the Swedish economy is now so weak that a key interest rate of today’s 4 percent is too high and restrictive. This speaks for several successive interest rate cuts. Many companies are in need of interest rate cuts so that they don’t have to give notice or, even worse, go bankrupt. We are probably at a bit of an economic crossroads, where the timing of the first interest rate cut and the number of cuts play a big role.
But even if the Riksbank lowers the interest rate at a rapid pace, in line with Nordea’s forecast down to 2.5 percent, it is a key interest rate clearly above the level that applied before the Riksbank started the interest rate increases. This means that households are facing continued financial cost pressure.
Interest rates with longer maturities have varied relatively much recently. However, the state of the economy and the fact that the Riksbank is expected to lower the key interest rate shortly suggests that these interest rates will not rise significantly in the future.
Mortgage rates are still significantly lower for fixed maturities than for the floating three-month rate. As the uncertainty is great, households considering tying up their mortgages should probably look at the shorter maturities. Nordea’s average two-year mortgage interest rate suggests that it could be attractive if the Riksbank stays at the three reductions in its main scenario. If there are more reductions and more in line with Nordea’s forecast, it is a little more doubtful whether it will pay off.
