Nestor: Loan debts in Estonia have never been so low

Mihkel Nestor.
Mihkel Nestor. Source: Priit Mürk/ERR

The hike in the European Central Bank's base interest rate and the ensuing increase in the Euribor and bank lending rates have not made life more difficult for people and businesses, nor have payment issues emerged. SEB analyst, Mihkel Nestor, said on the ERR "Otse uudistemajast" webcast that the volume of loan debts in Estonia is at its lowest level ever.

A six-month increase in the Euribor rate of more than 3 percent results in an annual increase of €2,000 for the average person with a loan balance of around €100,000 when compared to when the Euribor was zero; if the Euribor rises further, the annual increase will be €2,400-2,500, Nestor said.

As a result, the number of loan applications has dropped by one-third, and people are more cautious about buying a new home or car, postponing other purchases and borrowing.

Nestor said that the increase in interest rates has had little impact on individual and business repayments to banks, and there is no evidence of an increase in loan default. "Never before have businesses and individuals had such low loan outstanding debt levels," he added.

The decline in new borrowers is putting additional pressure on bank lending rates and sales volumes.

The rise in the Euribor has reduced lending and competition among banks may further reduce them. "There is still a great deal of competition in Estonia, and the strain is being felt as the price of money has risen once again, which can significantly reduce a bank's margin," Nestor said.

He said that downward lending volumes, and thus loan gains, could begin to limit banks' own business, forcing them to raise deposit rates. The increase of deposit rates has trailed behind the increase in the Euribor, Nestor continued.

Despite the fact that banks still keep a significant amount of money from people and businesses, he added that rapid inflation is eroding this and forcing banks to charge higher deposit rates.

Markets expect Euribor to fall

Currently, the six-month euro interest rate is just over 3 percent and it will likely increase to 3.5 percent by the fall, Nestor said.

It is expected that after that the Euribor will begin to drop, reaching 2-2.5 by the end of 2024.

Much will depend on the European Central Bank's interest rate strategy to combat excessive inflation, despite market expectations that the central bank will be unable to maintain high base rates for an extended period of time.

"There are countries that are heavily in debt. There are some countries where both individuals and businesses are deeply in debt. Interest rates must be reduced to stimulate the economy, but the central bank will not do so until inflation falls," Nestor said.

Rapid spike in core inflation indicates consumers have surplus funds

Core inflation, or inflation excluding energy and food, remains above 5 percent in the Eurozone, which is an astonishingly high rate considering the current situation and historical context, Nestor said.

In other words, high core inflation indicates that consumers have enough money to go out and purchase clothing.

Nestor said that his prediction of further price increases in Estonia was pure esoteric because of the many variables involved. It could be said that the projection of extremely high energy prices did not materialize, but since higher confidence is beneficial to the economy, gas and oil prices might still rise due to increasing demand, he said.

Nestor said that the fact that Estonia's inflation rate is among the highest in the Eurozone is normal, given our aspiration to attain the same living standards as Scandinavia and Germany. Consequently, if the European Central Bank has set a goal of getting inflation back to 2 percent, Estonia could be aiming for 3 percent or even higher.

Nevertheless, the purchasing power of Estonians remains stronger and does not appear to be diminished by persistently rising inflation. The volume of retail sales did begin to shrink somewhat towards the close of last year, but the decline was minimal," Nestor said.

People are still doing rather well, since our employment and pay growth are among the highest in the European Union, Nestor said.

Concurrently, people have also dipped into their covid period and pension reform-generated savings. At some time, savings will run out, which is why this year's consumption growth is expected to be close to zero," Nestor said.


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Editor: Kristina Kersa

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