Viljar Arakas, CEO of commercial real estate fund manager EfTEN Capital, said that the Euribor rate, governing most loans and leasing contracts, will climb to 3-4 percent and stay there for up to a year and a half.
"That is when the Euribor rate will start coming down again, while I would not dare predict it falling flat again, which is where it was for the better part of the last decade. Rather, it will be around 1-2 percent. But we should count on it being 3-4 percent for about a year before that happens," Arakas told "Vikerhommik."
Arakas also ran a simple calculation. A loan of €100,000 with a repayment period of several decades taken when the Euribor rate was 0 percent will become at least €3,000-4,000 more expensive per annum or by €250 a month after the hike.
"That is not the end of it. Euribor, loan and leasing obligations are one thing. Then come energy and food expenses. Yes, inflation is slowing and energy prices might come down, but base inflation will remain in goods and services we use more seldom than food. That part of price advance will be difficult to rein in.
The businessman recalled that he forecast Euribor hitting 1-2 percent by spring and was labeled a pessimist.
"It now turns out I was an optimist. In hindsight, interest rates should have been fixed back then. Now, central bankers all over the world are saying that the rates will be hiked by as much and as long as necessary. The latter makes for a separate question in terms of how long the European economy can take the high rates. That – how the European and especially southern European economy will fare – will determine next year."
Air being let out of the economy
Talking about the business situation and how Estonia should support companies, Arakas said that the chaff is being separated from the wheat. "The period of prioritizing rapid growth over profit will end. It's a good thing because it was not sustainable. But the adjustment will be difficult," he predicted.
He suggested supporting businesses for a single heating season to help them source new energy solutions.
"These are things you cannot change overnight, while you can reorganize things in a year. The problem is nearest for the processing industry for which energy is the largest cost component the use of which cannot be reduced immediately. Many will go out of business. And while we are looking at new power generation capacity in the future, this will not happen in the next few years as it simply takes time to build power plants."
In summary, Arakas said that while 2023 will not be worse than this year, it will not be markedly better either.
"Inflation will come down rather quickly. We will also adjust to interest rate hikes. Those in the market for a new apartment or other real estate are waiting to see where it will land. In terms of what kind of a home they can afford, their salary and whether their job will be there. Those are the questions people are asking themselves. The market will be quiet for a while as a result of this, but the economy is cyclical and life in Estonia will go on," Arakas said.
Editor: Urmet Kook, Marcus Turovski