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31-01-2023 10:03

It's not too late to protect your business against Sweden’s rising interest rates

The increase in interest rates in Sweden over the past year has been significant, and the upward trend is likely to continue in the near term. There is a way to protect your business against rising interest costs. Nordea's corporate loan with an interest rate cap offers the benefits of a floating-rate loan and the protection of a fixed interest rate ceiling.
Businesswoman standing against contemporary financial skyscrapers

Interest rates in Sweden have been on a sharp upward trajectory, and there’s still a way to go as the Swedish Riksbank tries to tame inflation.

Over the past year, the central bank has raised its policy rate by 2.50% points to the highest level since the global financial crisis. Variable mortgage rates have increased accordingly, and the Riksbank is not done yet, says Nordea Chief Strategist Henrik Unell.

“The central bank has communicated that they intend to raise the policy rate by a further 0.25% point in February 2023, and it is quite likely that this will be followed up by 0.25% point in April,” he says. The interest rate market is even more aggressive, pricing in that the Riksbank will eventually raise its policy rate to 3.50%. The development during December suggests that the market will be right, Unell adds.

Henrik Unell, Nordea Chief Analyst

Risks tilted towards higher interest rates

Central banks have no other option than to act forcefully against inflation, according to Unell, given their mandate of ensuring price stability. He explains that the disproportionate pandemic stimulus measures triggered inflation and the rise in interest rates. Deglobalisation and the war in Ukraine have added additional layers of complexity. There are currently no signs that inflation has started to fall, given the broad-based increase in prices of goods and services.

“I expect that Swedish inflation will not remain sticky at two-digit levels for too long but will eventually cool off in the near future,” he says. The real question is how quickly it will fall and where it will land, he adds. Unell argues that the inflation models central banks used in 2021-2022 were unreliable and gave a “false sense of security.”

Nordea’s forecast for the Swedish and global economies for 2023 is “quite gloomy,” Unell notes. Central banks are likely to adjust their monetary policy to adapt to the worse economic development in 2024, but that’s only if inflation falls to 2%. If price pressures persist, despite the weaker macroeconomic picture, interest rates will continue to stay elevated.

When it comes to interest rates, Unell sees the risks as asymmetrical – tilted towards higher rates rather than lower rates. He argues that the anatomy of markets has changed fundamentally and the low-rate paradigm is “dead and buried.” Even if the pace of inflation were to edge lower to 2%, that does not mean a return to the 0% interest rate environment.

“Private individuals and businesses should realise that the current inflation and interest rate story has more than one chapter, and the future is highly uncertain,” he says. “Arguments such as ‘floating rate loans are always best’ sound pretty hollow to me.”

Arguments such as ‘floating rate loans are always best’ sound pretty hollow to me.

Henrik Unell, Nordea Chief Analyst

Rebecca Sundkvist, Nordea Senior Analyst

An insurance policy against higher interest rates

One way for companies to guard against future rate increases while also benefiting from lower rates 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.

Rebecca Sundkvist, a senior analyst in Nordea Markets, works with many corporate customers that have taken out loans with variable interest rates. Historically, that’s been the most beneficial approach, but times have changed.

“Every day we talk to customers who are worried as their variable interest costs continue to rise. They wonder if it’s too late to protect themselves against rising interest rates,” she says.

Nordea’s corporate loans with an interest rate cap are a good option. In practice, they function like a variable-rate loan, but with a cap limiting the interest rate at a maximum level. The borrower pays a premium for this protection, as with an insurance policy. The higher the cap rate, the lower the premium.

“There is still a wide range of risks related to sustained high inflation and rising interest rates,” Sundkvist notes. “The Riksbank has communicated an alternative scenario: If inflation becomes persistent, we could see a policy rate of 4.50% in 2023. So it’s not too late to protect yourself against rising interest rates.”

It's not too late to protect your business against rising interest rates.

Rebecca Sundkvist, Nordea Senior Analyst

Emma Svenler, Nordea Analyst

Emma Svenler, an analyst in Nordea Markets, notes that if you lock in your interest rate today, you can only check after the fact if it was a good decision or not. With a corporate loan with an interest rate cap, you don’t have to think about it. You have protection against rising interest rates, and your interest costs will be lower if interest rates fall.

“We have customers who chose to protect themselves against rising rates with an interest rate cap at the start of 2021. Today they’re thankful they did as they’ve already benefited from the cap,” Svenler says, adding:

“Just as you would insure your home or your car against damage, think of an interest rate cap as an insurance policy, but against rising interest rates.”