MNI INTERVIEW: Mortgage Holders Overestimated Riksbank Cuts-FI

Swedish households have become more sensitive to changes in the Riksbank's policy rate as a result of surging demand for variable-rate mortgages, but borrowers appear to have bet on the central bank cutting deeper than it has, a senior analyst at regulatory body Finansinspektionen told MNI.

FI analysis found that after hitting a pandemic low of around 35%, demand for floating-rate loans surged, climbing to around 80% of new mortgages in 2024 as the Riksbank cut the policy rate from 4.0% in May last year to 2.75% by November. The rise in demand came despite their rates averaging a bit above 4.0% in 2024, making them more expensive than fixed rate loans, which fell below 3%, suggesting that households expected the central bank to keep on cutting, FI’s Henrik Larsson said in an interview.

In 2024 the media highlighted how inflation had dropped and "that the central bank was expected to cut the [policy] rate. I think ... that even households that normally don't consume economic news ... picked this message up and they decided to go for the floating rate," Larsson said.

In the event, the RIksbank went on to cut to 2.25% by February this year, but has signalled that that this may be the floor.

"Households now are disappointed that ... as it appears right now the central bank will probably keep the rate here for a long time,” he said, noting that with many floating rates around 3%, barely matching earlier fixed-rate offers, "many households did expect more [easing]." (See MNI INTERVIEW: Rapid Rate Move Up More Plausible-Riksbank Head)

RATE-SENSITIVE HOUSEHOLDS

While households are very sensitive to rate moves, which affect confidence and consumption, FI does not see residential mortgages as a financial stability threat despite borrowers’ expectations for lower rates, Larsson said, though FI has highlighted risks from commercial real estate in its stability reports.

"We believe that the high household debt is mainly a macroeconomic risk. It could quickly impact household consumption. We don't see an immediate threat to stability," he said.

The good news for the Riksbank is that compared to other central banks it will find households more responsive to any policy moves it makes, whether it resumes cutting again due to the trade shock hit on activity or if it tightens to prevent inflation expectations become dislodged from target. (See MNI INTERVIEW: Riksbank Eyes Inflation Expectations - Jansson)

Household rate sensitivity "should be very high ... that is a good thing for the Riksbank," Larsson said.

Data for February 2025 show that over 70% of the stock of Swedish mortgages are for less than three months, just 1.4% for over five years, and with 23% for between one-to-five years.

Rate changes feed through swiftly to consumer confidence, with Larsson noting that the National Institute of Economic Research's household confidence index correlates closely with monetary policy. The NIER household index hit a low in 2022 and 2023 but rebounded in 2024 as the Riksbank cut the policy rate, though it has fallen back again in 2025.

"The last five years have been very rough for the households with the pandemic and inflation shock ... 2024 was a year of normalisation, but now it remains to see what will happen in future," Larsson said, speaking against the new backdrop of market turmoil.