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Analysts believe interest rate hikes will not rein in inflation quickly

The European Central Bank raised interest rates by another 0.5 points this week seeking to slow down rapid price advance. While this will render borrowing more expensive still, analysts in Estonia do not believe the move could quickly bring inflation in under control.

While the ECB's recent rate hike is more modest than previous ones, it will likely not be the last. The base rate also hikes Euribor based on which loan and leasing payments are calculated. The new hike will add roughly €50 to the monthly payment of the average Estonian home loan just north of €100,000.

"Having come from 0 percent to 2.5 percent in six months, interest payments have grown by over €200," said Kristo Aab, analyst at LHV.

"If I had to put together a family budget based on loan expenses today, I would count on Euribor hitting at least 4 percent. Thinking about the effect this will have on companies, many households will have to give up non-essential products and services," said Peter Priisalm from asset managers Avaron.

While the ECB hopes the interest rate hikes will slow down inflation, analysts suggest this will not be achieved quickly.

It could happen should we see a much deeper recession than what the ECB forecasts today," Priisalm said.

"Eurozone inflation is mostly down to energy that has made up 40-50 percent of it and is relatively difficult to affect using interest rates. Rather, the danger is that while energy prices are transferred directly, it is easy to hike other prices in their shadow, analyst for SEB Mihkel Nestor said.

Analysts believe the rates will be hiked again in February and March.


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Editor: Merili Nael

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