05-04-2022 09:46

Interest rates are rising: Here’s what Swedish companies can do

As central banks begin to tighten monetary policy, companies need to manage their interest rate risk. With Nordea’s corporate loans with interest rate caps, businesses can benefit from today’s low interest rates while also guarding against the higher rates on the horizon.
Woman working at a table

Central bankers around the world are signalling they’re willing to take more aggressive action to bring down surging inflation. For companies, that means it’s time to adopt the mindset of a risk manager, says Nordea Chief Strategist Henrik Unell.

“If you have a large balance sheet, and you’re thinking along the lines of the past – that the only way interests rates go is down – it’s time to think again,” he says.

One way to still take advantage of the current low rates while protecting against the risk of future rate increases is through Nordea’s corporate loans with interest rate caps. They combine the benefits of a floating-rate loan with the security of a fixed-rate loan as the interest rate cost is capped at a certain level.

Henrik Unell, Nordea Chief Analyst

A shift to tightening mode

Central banks are sharpening their rhetoric as they shift towards policy tightening, and Sweden’s Riksbank is no exception. On 23 March, Deputy Governor Anna Breman said the central bank may need to hike the benchmark interest rate or start to shrink its balance sheet sooner than expected. Riksbank Governor Stefan Ingves sent a similar message in an interview the week before.

Sending such signals between policy meetings is highly unusual for the Riksbank and highlights how much the recent high inflation prints have surprised the central bank. When it comes to its forecast for core inflation, the bank is facing one of its largest revisions ever.

“In the course of two weeks, the Riksbank has gone from, ‘We’re not going to raise rates until the second half of 2024’ to, ‘We’re going to hike rates soon.’ That is a huge shift,” says Unell.

The pattern is similar to that seen from other central banks, which have tended to view rising inflation as a temporary biproduct of the pandemic.

Risks are tilted towards way higher rates than we have today.

Henrik Unell, Nordea Chief Analyst

Expect ‘way higher rates than we have today’

Inflation is proving to be “sticky in the way central banks don’t like,” Unell says, noting that it has spilled over from goods to services and also to wages in the US. He expects the same to happen in Sweden and the rest of Europe, with a delay due to labour union frameworks. The US Federal Reserve and other central banks are now responding with a hawkish pivot.

“Until you see central banks’ rate hikes starting to bite and bring inflation under control, rates are going to continue to increase,” says Unell. “We’re surprised the levels aren’t higher than they are. We still have very low rates.”

The market has adopted the narrative that inflation will be dealt within the next 15 to 20 months, as the yield curve shows. Unell disagrees, doubting that such a short time span will be sufficient. He calls the latest developments a “paradigm shift” in inflation and central bank policy.

“The low inflation world we’ve lived in since the financial crisis ended with the pandemic, and it’s not likely to return,” says Unell. He points to the war in Ukraine, efforts to eliminate fossil fuels and reduce energy dependence as well as higher production costs in China as contributing factors.

“Risks are tilted towards way higher rates than we have today,” he says.

Interest rate caps: The best of both worlds

There are ways for companies to take advantage of today’s still historically-low rates, while also protecting against future rate increases. Nordea, for example, offers corporate loans with interest rate caps, that function like a floating-rate loan that’s capped at a certain rate level.

Swedish companies are starting to act and take advantage of interest rate caps, says Hanna Lönnqvist, who works on the Swedish Derivatives Coverage team in Nordea Markets.

“This product has become quite appealing as fixed-rate loans have become more expensive in today’s market environment,” she says. “It’s the best of both worlds as you benefit from paying low floating rates now but also have protection if the rates go up beyond a certain level.”

The client sets the level of the cap and the maturity. In general, the lower the cap, the higher the premium, which is comparable to an insurance policy.