Upward pressure on Swedish mortgage rates goes beyond Riksbank decision

On 20 December 2018, the Swedish central bank (the Riksbank) will announce whether it will raise its primary policy rate, or repo rate, for the first time since July 2011. It is uncertain whether the rate hike will happen now given weak inflation figures, slowing domestic growth, ongoing Brexit negotiations and a growing consensus that the global economy is wavering. However, a recent 25 bps increase in three-month STIBOR could indicate that the market expects a hike.

NCR believes that although a repo rate hike is likely to result in higher mortgage rates, as was the case after a September hike in Norway, it is only one aspect of the Riksbank's changing monetary policy that could affect mortgage rates. In addition, NCR expects that the end of quantitative easing (QE) in Sweden, i.e. the Riksbank's purchase of long-dated government bonds, will not only increase government bond rates, but also affect covered bond rates and force banks to protect margins.

Furthermore, the factors affecting the Riksbank's path forward present a risk for Swedish mortgage rates. Historically, the spread between government and covered bonds has increased during periods of macroeconomic stress. If markets are concerned about the prospects for Swedish banks, the housing market and the economy in general, the spread between Swedish government debt and covered bonds is likely to increase, with or without dramatic changes in monetary policy.

In NCR's view, the factors working against higher rates – competition, higher deposit margins or a delayed rate hike – are not enough to compensate for the upward pressure, nor to prohibit material increases in mortgage rates. However, despite the possibility to fix mortgages at historically low rates with listed rates below two percent for up to five-year fixing periods, around 70% of new mortgages are still issued with floating rates (three-month rates) in line with the Swedish aggregate.

If you have any questions, please contact:
Sean Cotten, Lead analyst, +46 732 32 43 78, sean.cotten@nordiccreditrating.com
Geir Kristiansen, Analyst, +47 90 78 45 93, geir.kristiansen@nordiccreditrating.com
 

Nordic Credit Rating AS is a credit rating agency headquartered in Oslo with a branch in Stockholm. The company provides credit ratings to companies and financial institutions in the Nordic region, and bases its analysis on local insights. Nordic Credit Rating is registered with the European Securities and Markets Authority (ESMA).