Estonian analysts divided over future interest rate hikes

Euro bills and cents.
Euro bills and cents. Source: Karin Koppel/ERR

The Governing Council of the European Central Bank (ECB) on Thursday decided to raise three key ECB interest rates again, effective September 20. Analysts, however, are split over when interest rates may start to fall again.

The ECB once again raised its key interest rates, which have now reached record high levels.

Thursday's marked the central bank's tenth consecutive hike. The most crucial of these, the deposit facility interest rate, increased from 3.75 to 4 percent.

The ECB's goal is to get euro area inflation back down to its target 2 percent. Average inflation in the euro area, meanwhile, is forecast to stand at 5.6 percent.

The bank noted that inflation is slowing, but not as much as they'd like.

"Inflation continues to decline but is still expected to remain too high for too long," ECB President Christine Lagarde said at Thursday's press conference. "We are determined to ensure that inflation returns to our 2 percent medium-term target in a timely manner. In order to reinforce progress towards our target, the Governing Council today decided to raise the three key ECB interest rates by 25 basis points."

The ECB staff's September macroeconomic projections for the euro area see average inflation at 5.6 percent in 2023, 3.2 percent in 2024 and 2.1 percent in 2025, she continued. "This is an upward revision for 2023 and 2024 and a downward revision for 2025," she added.

ECB interest rates also impact the Euribor, or Euro Interbank Offered Rate, which in turn impacts Estonian residents' loan and lease payments. The six-month Euribor rose on Thursday, now reaching just below 4 percent.

Analysts are divided on whether any relief in interest rates can be expected soon.

"This interest rate was increased to its highest level in euro area history, and if you look at the decision made today, it does appear to indicate that this interest rate hike will be the last," Swedbank chief economist Tõnu Mertsina said Thursday.

"We're still currently forecasting that the ECB may start bringing down interest rates from next spring, because in addition to the inflation matter, what's also important now is how high interest rates have affected the economy, and high interest rates are already increasingly reducing demand," Mertsina added.

"I don't yet share the general optimism regarding the decline of inflation, and therefore I wouldn't rule out interest levels in Europe going up even further within the next couple of years," Redgate Captial CIO Peeter Koppel said.

"Generally speaking, plans should be made or it should be taken into consideration what would happen if the Euribor were 5 percent," Koppel continued. "Borrowers should consider that interest rates will remain higher for longer. This idea that the Euribor rising to 4 percent, for example, is some kind of scary, terrible and unusual thing and that it will soon return to 1 or 0.5 percent — there's no point waiting for something like that."


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Editor: Aili Vahtla

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