Bank of Estonia economist: Euribor is rising, interest margins are falling

Bank of Estonia economist Taavi Raudsaar.
Bank of Estonia economist Taavi Raudsaar. Source: Bank of Estonia

Triggered by the European Central Bank (ECB) raising interest rates, the Euribor, or Euro Interbank Offered Rate, has risen fast in recent months, reaching 2 percent by mid-October. At the same time, interest margins added to the Euribor for housing loans and car leases have fallen somewhat thanks to competition between Estonian banks, Bank of Estonia economist Taavi Raudsaar said Thursday.

The Euribor has risen fast in recent months, Raudsaar said according to a press release. The six-month Euribor, which is used as the base for the majority of housing loans and corporate loans issued by commercial banks operating in Estonia, was still negative at the beginning of June, but had risen to 2 percent already by mid-October.

The Euribor is rising because inflation remains high throughout the euro area, and the Governing Council of the ECB is tackling it by raising the interest rates at which commercial banks can deposit money at or borrow from the central bank. This then raises the interest rates at which commercial banks in the euro area are prepared to lend to one another, which is shown by the Euribor.

At the same time, the interest margins added to the Euribor for housing loans and car leases have fallen somewhat. The interest margin for newly issued housing loans as well as for housing loans where changes were made to existing contracts fell to an average of 1.6 percent this September, down from 2.1 percent on year. The interest margin on newly issued housing loans alone simultaneously fell from 2 percent a year ago to 1.8 percent this September.

Interest margins are narrowing because banks operating in Estonia receive a large part of their funding from demand deposits, which have an interest rate close to zero that has not significantly increased. This means that the interest costs of banks in Estonia have not particularly increased either. The rise in the Euribor, meanwhile, has helped them earn more interest income from lending, which in turn has allowed banks to reduce interest margins on their loans without losing any profits, which they have done due to tighter competition. Competition has increased as some banks have ambitious growth plans, the economist said.

Meanwhile, the interest margins on loans issued to businesses have remained steady on year. Given that the outlook for the economy has deteriorated over the past year and risks have simultaneously increased, interest margins remaining the same is undoubtedly good news for businesses.

It is likely that some other lending conditions have tightened somewhat, and that this factor combined with the rise in the Euribor have tempered companies' assessments of the lending market.

Access to loans is generally still good at the moment, Raudsaar noted. This is indicated by the rapid growth in lending, for example, as the yearly growth in the corporate loan and lease portfolio accelerated to 12.5 percent in September. Real estate companies in particular stand out for their better opinion about lending as well as their rapid growth in borrowing.


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Editor: Aili Vahtla

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