Analysts: Interest rate rise cycle coming to an end

SEB building in Tallinn.
SEB building in Tallinn. Source: Siim Lõvi /ERR

The European Central Bank (ECB) is expected to hike interest rates by a further 0.5 percent this year. But analysts believe the peak will be reached in 2023 and then the rate-rising cycle will come to an end.

The interest rate rise will be accompanied by an increase in the Euribor which will likely hit almost 4 percent and raise borrowing costs.

The ECB believes Euro area inflation is still too high, Thursday's "Aktuaalne kaamera" reported.

"Inflation still continues in the Euro area. If we look at a year ago, prices have risen by 7 percent; if we look at a shorter period, perhaps six months, prices have risen by around 2.5 percent, which still makes an annual increase of 5 percent. And this is significantly higher than the European Central Bank's inflation target of 2 percent," Luminor's chief economist Lenno Uusküla told the show.

Rates are likely to rise again at the ECB's meeting in July, he said.

But SEB analyst Mihkel Nestor the cycle of rate rises will end this year as any further increases will become too harsh for the economy. He said two more rises are expected in 2023, which will take the rate to around 3.75 percent.

People with loans, especially those used to buy property, are affected by the Euribor and the average Estonian is approximately €50,000 in debt. The rate rise will add an additional €100 per month.

"Loan servicing costs are obviously rising, but most of this interest rate increase has been absorbed by now. If the six-month Euribor was 3.6 and a bit above, we are not talking about double that level," said Uusküla.

Inflation is expected to continue on its downward trend.

Nestor said: "The idea is that borrowing will get more expensive, our lives will get worse, and we'll be able to afford fewer things. You wouldn't be able to buy such an expensive flat, you wouldn't be able to buy such an expensive car. And if people become more frugal, then it will be very difficult for traders to raise prices and this should bring inflation down."

Euro area inflation was 6 percent in March compared to Estonia's 15.6 percent.


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Editor: Marko Tooming, Helen Wright

Source: Aktuaalne kaamera

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