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Finnish households unprepared for interest rate hike, says bank

A Nordea Bank economist says strong consumer confidence means people are buying more and saving less, which will make it hard to cope with looming interest rate rises.

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Finnish residents with household debt should start preparing now for a rise in interest rates, says Nordea economist Olli Kärkkäinen. He says that even if the European Central Bank has indicated that it won't hike rates until early next year, it is good to make the necessary calculations now.

"At this stage, every household could assess its financial situation. They could ask themselves how things would look if the rates were one or two percentage points higher than they are now and analyse what needs to be done to keep things in balance," he advises.

Finnish household savings levels have been falling steadily since the year 2010. Until early this year, the household savings rate – the ratio of savings to disposable income – had been negative for over two years, as wages remained stagnant and people borrowed more to make ends meet.

"That's why the turn-around in early 2018 is so positive. From January to March of this year, income grew faster than consumption, and the savings ratio was on the plus side again," he says.

Despite this recent bit of good news, growing household indebtedness is a mounting problem in Finland, and the situation could still turn drastic if the economy dips, the banker noted.

"Two fast-growing factors are contributing to this at present: housing company loans and easy consumer credit. They both lead to potential over-indebtedness. I'm not so worried about the big-picture situation in terms of the national economy, but individual households are really starting to be at risk," Kärkkäinen warns.

Saving has fallen out of fashion in Finland

Minna Markkanen, development director of the Guarantee Foundation, a national organisation assisting private individuals with financial difficulties, says Finnish society today is very consumption-oriented and credit-focused.

"We have a market-driven 'live for the moment' mentality, where you buy something today and pay for it tomorrow. It's almost as if the immediate gratification from buying something on the spur of the moment is seen as more satisfying than the feeling that comes from saving for something first," she says.

She says that online shopping, digital payment methods and the growing selection of companies peddling easy credit has made it increasingly effortless for consumers to take on debt to buy things they fancy. Not too long ago, the places were credit was available in Finland were much more limited.

This has led to the current situation, in which some Finnish households have racked up as much loans in unsecured consumer credit as they owe on their home.

Interest rate increase could trigger debt spiral

Markkanen says she is expecting many new clients at her debt consultancy organisation after the interest rate increase is announced.

"Even a small change to a budget that is already stretched can be dramatic. Many of our customers say that a debt spiral can start with a very small variation," she says.

This is why it is wise to maintain a separate bank account with a buffer fund, for when unexpected situations arise. Ideally, the account would hold between one and two's month's net salary, she says.

"You can save to buy a home or enjoy a holiday, or to achieve a slightly better income level in retirement. If you practice this kind of preliminary saving, the interest rate hike mechanism works to your benefit. If you fund everything with loans, it works against you and you have to pay more," says Nordea's Kärkkäinen.

Edit: A previous version of this story stated Olli Kärkkäinen's title as head of Nordea Bank's Personal Banking unit.

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