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Luminor chief economist: Interest rates unlikely to rise much for people

Lenno Uusküla.
Lenno Uusküla. Source: Siim LõvI /ERR

Even if the European Central Bank decides to raise interest rates again in December, it should no longer be reflected in the six-month Euribor index, which is connected to a number of loans in Estonia, said Lenno Uusküla, chief economist at Luminor Bank.

"Although the European Central Bank has been raising interest rates, the ones we are concerned with, the 6-month Euribor and the 12-month Euribor, are no longer reacting to what the central bank is doing. The central bank is trying to get interest rates up in order make our lives more expensive, but is finding it increasingly difficult to do that," Uusküla said on ETV show "Terevisioon."

Uusküla explained that while the central bank provides weekly loans, for banks, six-month loans are more important. "And now it is the case, that if the central bank raises the short-term interest rate, but the long-term interest rate does not go up, then the expectation is that the interest rate will go down in the future," he said.

However, interest rates should not be expected to start falling quickly,  the chief economist at Luminor Bank stressed. "This 0.25 percentage point drop is probably not yet the one that is going to change lives. At the start of next year, we won't yet feel it very clearly."

Uusküla added that interest rates could be brought down significantly by bad news, such as problems with the eurozone economy or if German industry starts to perform badly, as confidence indicators are currently showing.

"However, if that really does happen, then price pressures in Germany will come down, wage pressures in Germany will disappear and then the European Central Bank can congratulate itself on moving close enough to its inflation target," he said.

According to Uusküla, looking at the current economic data, the European Central Bank probably ought to raise interest rates in December as well. He added that inflation in the euro zone has not yet declined, and has even risen over the past year, while economic growth in the euro zone has also been fairly strong.

However, central bank interest rates will no longer have a direct impact on people's pockets as they did up until July, Uusküla said.

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Editor: Michael Cole

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