The Chief Economist’s blog: The risk of rising interest rates is moderate for households, but poses a clear threat to economic growth

Share of interest expenses historically low

In 2021, Finns spent about 1.4% of their disposable income on interest on loans. The figure was the lowest on record, even though Finnish households’ debt has increased steadily for nearly 25 years. Increased income and lower interest rates have made it possible for households to spend an ever-smaller share of their income on interest rates. This has facilitated many households’ financial position and there has been more money to spend on other things.

We have prepared a forecast  of how different changes in interest rates affect household interest expenses. An increase of one percentage point in the general interest rate by 2024 would increase the share of household interest expenses to 2.7% of disposable income. An increase of three percentage points in interest rates would increase the share of interest expenses above the previous peak, recorded in 2008.

Increase in debt increases interest rate risks

Falling interest rates have made household indebtedness possible in such a way that the increase in debt has not reduced spending opportunities. In 2008, the household indebtedness rate was 107%. This figure measures the ratio of debt to disposable income. In 2021, the ratio had risen to 136%. The increase in the ratio indicates that household debt has increased faster than income. The more debt households have, the more significant the negative impact a rise in interest rates has on spending opportunities.

Higher interest expense means less other spending

Although moderate increases in interest rates do not automatically pose a significant risk to households, changes in interest rates are reflected in the economy. As household interest expenses rise, other spending decreases. Roughly speaking, each increase of one percentage point in the general interest rate level increases household interest expenses by EUR 1.8 billion. The rise in interest rates also adds to the risks in the development of housing prices, as households' ability to take out loans is weakened.

The long-term decrease in interest rates has reduced household interest expenses. As the interest rate level rises, this trend is now threatening to change, which means that a rising interest rate level will weaken household spending opportunities and may slow down economic growth.

Lasse Corin lasse.corin(at)aktia.fi
Twitter: @lassecorin