This speaks against lowering the interest rate

 

Inflation
 

Three factors: It may threaten the interest rate cut

Andreas Cervenka

Reporter and economic commentator

This is a commenting text. Analysis and positions are the writer's.

Updated 09.10 | Published at 09.00

 

 

Many Swedes with mortgages probably hope that the interest rate will be lowered on Wednesday, but it has not yet been decided. Photo: Fredrik Sandberg/TT News Agency

To lower or not to lower?

The Riksbank is faced with a tough decision ahead of the interest rate statement on Wednesday 8 May.

This speaks for and against a reduction.
 

Quick version

• The Riksbank will make a decision on the interest rate on Wednesday 8 May.
• Factors in favor of a reduction include low inflation, reduced business activity and loan growth within the economy.
• Factors that militate against a reduction include rising inflation in the US, the decline in the krona and the uncertainty surrounding the economic future.

Rarely have so many people taken so much interest in something that should be so undramatic.

Masked Singer in all its glory, but guessing the interest rate is the closest you can get to a popular campfire in today's Sweden.

That, if anyone thought otherwise, is not very healthy.

The Riksbanken's key interest rate should really be a boring and predictable story.

The fact that it has become everyone's concern is due to the fact that the Swedes have so much debt and that the Riksbank has had a bit of a shepherd's moment in its playhouse with all kinds of monetary policy experiments in the last ten years.

Just the expectations about which way the interest rate will move has become the most important driving force in the economy.

Many have already factored in several interest rate cuts this year, which left a mark both in rising house prices and that households are a little more optimistic in the measurements made by the state Institute of Economic Research.

But forecasts are, after all, just air in fancy clothes, and in reality the Riksbank's executive board faces a bit of a dilemma at its meeting that starts at 9 a.m. on Tuesday (the interest rate decision itself will be communicated at 9:30 a.m. on Wednesday, May 8).

The last time the Riksbank raised the interest rate was at the end of September last year. Since then, the key interest rate has been at 4 percent.

This argues against a reduction:

Inflation

The figures for March showed that the consumer price index CPI increased by 4.1 percent in March. If you subtract the effects of interest rate increases (a measure known as CPIF), inflation was 2.2 percent, which is close to the Riksbank's target of 2 percent. It is also the lowest inflation since July 2021.

The figures above show how much prices have risen in one month compared to the same month last year. If you look month by month, however, KPIF has been stagnant for six months.

Talk has already begun that inflation will perhaps be too low in the coming year.

The economy

Raising the interest rate has the same function in an economy as stepping on the brake pedal. A prerequisite for this to be a relevant measure is that there is a forward movement in the initial situation. That is more than can be said about the Swedish economy right now. In the first quarter, GDP shrank for the fourth quarter in a row. This suggests that it is time to ease off the brakes and lower the interest rate. In addition, unemployment has risen, as has the number of bankruptcies.

Loan growth

Interest is the same thing as the price of money. The whole purpose of raising or lowering the interest rate is to influence how much loans are taken out in the economy. And here the interest rate increases have already had an effect, to a large degree. There has been a complete halt to new lending to both households and businesses in the past year. In recent months, consumer loans have increased a little, but this is hardly a good sign, but could just as well be due to people taking out expensive loans just to stay afloat.

Inflation not under control in the US

At the beginning of the year, the market expected several interest rate cuts from the American central bank, the Federal Reserve. That doesn't seem to be the case. In the US, inflation has recently started to rise again. Now, as you know, Sweden is not in the United States, but what the Federal Reserve does affects the whole world, sooner or later. Another thing that is also haunting is that world market prices for raw materials such as oil and copper have risen this year. That usually means higher prices after a while.

The crown has collapsed – again

Expect a lot of bad dad jokes this summer about how expensive everything has become. Today, one euro costs SEK 11.65 and one dollar costs SEK 10.82, clearly more than at the beginning of the year. This helps keep inflation up as imports become more expensive. If the interest rate is lowered, the risk is, at least theoretically, that the krona will lose even more. This is because investors get a lower return on Swedish fixed-income securities and then want to sell them and thus exchange their kroner for other currencies.

The wait and see factor

The Riksbank has not directly overachieved in its handling of inflation and was late in raising it. The absolute last thing the Riksbank's management wants to happen is for them to first lower the interest rate and then be forced to raise it again. This suggests that they are waiting to lower until June when more figures have come in that show how inflation and the economy are developing.

Most things still indicate that there will be a reduction on Wednesday. The forecasts from most bank economists also suggest that the Riksbank's key interest rate will be clearly lower at the end of the year than today. If you want to be a little mean, you can state that the best tip lately has been to assume that the Riksbank is wrong. At the beginning of inflation, the interest rate was raised too late and too slowly, and with the same logic, the interest rate has subsequently been raised too much and too quickly. This suggests that the economy collapses during the summer and forces a large reduction.

But if there is one thing that the crises of recent years have taught us, it is that the only thing that is really certain is that nothing is certain.