Interest rates will keep climbing next year to combat inflation

Madis Müller.
Madis Müller. Source: Ken Mürk/ERR

Prior to this point, it was expected that the European Central Bank would keep raising base interest rates until this summer. However, it is possible that the European Central Bank will keep raising the rates into next year. This means that businesses and individuals will face growing borrowing and leasing costs for an extended period of time.

After a lengthy period of negative rates, the European Central Bank began to increase base interest rates last summer.

Earlier, the financial markets thought that the central bank would increase interest rates until July only, but they now anticipate a hike even in 2024.

Bank of Estonia Governor Madis Müller said that the rise in interest rates has already had an impact on inflation, albeit the numbers are still higher than they should be.

"I do believe that the optimism that existed in the financial markets a few months ago, when it was expected that the central bank would raise interest rates to a certain level by the summer and then quickly begin lowering them, has been fueled by a very strong desire for interest rates to actually fall that fast," Müller said.

Swedbank's top economist, Tõnu Mertsina, predicted that the cost of borrowing will continue to rise for people and companies alike.

The central bank's interest rate hike will also immediately increase the Euribor rate, which is related to people's mortgages; every 0.5 percentage point increase in the Euribor will increase the average monthly home loan payment by about €30.

"On the one hand, because interest rates are increasing, those who have loans, who bear the burden of loans, must pay higher rates; and yet, at least according to the current prediction, inflation appears to be slowing down," Mertsina said.

Karin Jeveer, an economist at the Tallinn University of Technology (TalTech), said that boosting interest rates in an effort to control inflation has a chilling effect on the economy.

"Obviously, it is a delicate balancing act to choose how long and how quick to raise. It is, of course, one of the bottlenecks that the people who are living in an overburdened new interest rate environment, that they may find it harder [to make ends meet]," said Jõeveer.

"I do not believe that the current increase in interest rates is suffocating the average Estonian borrower, whether they are a homeowner or a business owner with a business loan. Rather, the central question is whether we can address rapid price increases in Estonia and throughout the Eurozone," Müller said.


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Editor: Mari Peegel, Kristina Kersa

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