Rising interest rates put pressure on indebted households and firms

Interest rates are rising rapidly in the wake of high inflation. High interest rates and lower risk appetite are placing downward pressure on risk-taking and asset prices. In the long term, this can slow the growth of debt and benefit financial stability. However, the large debts that built up over the extended period of low interest rates are putting pressure on highly indebted households and firms.

"Interest rates are rising, and the vulnerabilities that have built up over an extended period of low interest rates and high risk-taking are now being exposed. Even if stability can be strengthened in the long term through normalisation, highly indebted households and firms are now under pressure. To strengthen the banks' resilience, we are therefore raising the countercyclical buffer rate," said Director General Erik Thedéen.

The year started with growing concern for the high and rising global inflation. Russia's invasion of Ukraine spurred on inflation at the same time as the conditions for growth were impaired. Interest rates and interest rate expectations have increased sharply since the end of the year, and the financial markets have experienced falling valuations and greater fluctuations.

Even if FI makes the assessment that mortgagors as a whole demonstrate resilience, the effect of higher interest rates can be significant, particularly for households with high debt and low margins. The rising interest rates, therefore, could lead to lower consumption, lower savings and lower housing prices.

Many firms have also accumulated considerable debt while interest rates were low. One sector that is particularly vulnerable to higher interest rates is the commercial real estate sector. This sector is now facing the challenge of rapidly rising financing costs, which will reduce profitability and could lead to a drop in real estate prices.

FI has previously highlighted the risks posed to financial stability when problems in the commercial real estate sector spread to banks and other parts of the financial system. In light of these risks, the banks need to continue to hold large capital buffers. FI therefore plans to raise the countercyclical buffer rate in June to a neutral level of 2 per cent.

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