Chat with Stefan Ingves 18 December 2012
Governor Stefan Ingves chatted in Swedish on the Riksbank's website. This is a translation into English of the questions and replies.
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Hello Stefan Ingves! Today's repo-rate cut makes it even cheaper to get into debt! Who do you at the Riksbank think should take responsibility for households' high indebtedness now that the banks are lending money at abnormally low interest rates? Do you think all households will be able to manage their loans when we have a more normal repo rate
Magnus (14:34)
Reply: It is primarily households themselves, together with the banks, that need to determine how large a loan they can manage. If this leads to too much lending, Finansinspektionen (the Swedish financial supervisory authority) will need to intervene with regulations. The so-called mortgage cap of 85% is an example of this type of regulation. One can also introduce requirements for amortisation or set a limit for the size of the loans in relation to income. Of course, it is important that one bases one's calculations on a normal repo rate plus an additional margin, i.e. that one takes into account the fact that interest rates are unusually low at present.
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How much can we expect the banks to cut their lending rates by now? There is a risk that the banks will not make any changes as in the case of earlier cuts.
Magnus Hunnevall (14:35)
Reply: One cannot expect an immediate one on one reaction. However, over time rates follow one another closely so after a while interest rates have fallen around the same amount.
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What consequences will this cut have?
Tobias Cato (14:37)
Reply: We are cutting the repo rate to support demand in the Swedish economy. It will be slightly cheaper to borrow, demand will be maintained and inflation will gradually rise towards two per cent.
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How does the repo-rate path for 2013 look?
Torbjörn Lindegaard (14:38)
Reply: We have now cut the repo rate to one per cent and we are expecting it to remain at roughly this low level for the coming year.
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Is 4.0% still considered a normal level for the repo rate, and do you believe that those taking out mortgages now understand that 1.0% plus the bank's lending rate is abnormally low? Do you believe that they will be able to pay their loans when the repo rate is at a normal level plus the bank's lending rate? Is there a risk that today's low repo rate will create low interest rate "doping" among mortgage borrowers?
Johan (14:41)
Reply: Yes, we believe that mortgage borrowers are aware that the repo rate is now unusually low and that one has to use higher interest rates when calculating how high a mortgage one can manage. At the same time, an increasing number of people are borrowing more and more money in relation to their incomes and fewer are amortising their loans. This means that the risks are constantly rising and cannot be disregarded.
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In Sweden you are rewarded for borrowing rather than saving! How could things go so wrong?
Oscar (14:44)
Reply: We have a low interest rate to support a general good development of the economy and to ensure that inflation is close to the target of two per cent. This also means that at present one receives less return on savings. The situation will normalise when growth and inflation return to their normal positions, that is, an inflation rate close to two per cent.
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Why don't the major banks cut their mortgage rates directly from the date the new repo rate begins to apply? Don't they have to do this?
Torbjörn Lindegaard (14:46)
Reply: No, they don't have to do this, as we have free rate-setting in Sweden. On the other hand, the banks are dependent on the interest rate we set, so after a while interest rates always adapt to the repo rate.
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A majority of Executive Board members appears to have been sceptical to the effect an interest rate cut will actually have when households and companies are concerned about what is happening abroad, and what this will mean for the Swedish economy. What effects do you think that today's repo-rate cut may have?
Axel (14:49)
Reply: If one looks at how interest rates follow one another over time, they are usually very similar. This means that when we cut the repo rate it has an effect on confidence and the propensity to consume and invest, that is, it affects demand in the economy. The size of the impact the repo rate has may vary substantially over time, but the direction of the impact is clear. If one cuts the interest rate, demand and inflation rise.
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Hello Stefan! Will you be cutting the repo rate further?
Tobias Cato (14:51)
Reply: We have now cut the repo rate to one per cent and we are assuming that it will stay at this level for the whole of next year. At the same time, one should remember that this is a forecast and not a promise. If there are major events in the world around us or in Sweden, we may need to reconsider our decisions further ahead.
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Hello Stefan Ingves! There is a lot of talk about households' high debts, at the same time as households have good assets, but the problem is that only a small part of their assets is liquid! A large fall in housing prices would mean that the greater part of their assets disappears but not their debts! What does the Riksbank think about this?
Fredrik (14:54)
Reply: Yes, this sort of scenario is the eternal problem with debts. If the assets are lower than the debts, one has to save more, try to amortise so that one can catch up. If this happens, it has a negative effect on consumption and economic activity declines. This is the sort of scenario we want to avoid.
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Hello! Will you continue to call for new regulations regarding the housing market until you bring down prices or lending to households comes to a halt? Regards.
Biyik Sulu (14:56)
Reply: If loans continue to rise more quickly than incomes, we will gradually reach a point where there will probably be more regulations introduced. The best thing would be if the banks themselves ensure that the situation calms down. They can do this, for instance, by requiring amortisation payments on new loans.
