European Central Bank may soon increase interest rates

Monthly mortgage payments may go up in Estonia.
Monthly mortgage payments may go up in Estonia. Source: Christoph Scholz/Creative Commons

The Finnish branch of Nordea Bank is predicting that the European Central Bank (ECB) may soon increase interest rates. The Bank of Estonia believes that this in turn could mean hikes in monthly mortgage payments.

Based on information shared by Nordea Bank economist Olli Kärkkäinen, Finnish media has reported that the ECB will inevitably increase its interest rate in the next few years.

This in turn would affect the Euro Interbank Offered Rate (Euribor), or the euro area's interbank loan interest rate, which also serves as the basis for Estonia's mortgages. That would mean that monthly mortgage payments would increase in size as well, explained Jaak Tõrs, head of the Financial Stability Department of the Bank of Estonia.

"If we consider the fact that the average home loan in Estonia is €100,000 and assume that a specific, fixed sum is paid back each month, then the greatest interest payment could be up to €1,000 bigger than last year, or approximately €80 bigger per month," Tõrs explained.

In the decade to follow the financial crisis, the ECB has kept interest rates low in order to encourage investments and boost inflation. Now that consumption and other forms of economic activity have increased, the ECB intends to begin stabilising the situation.

Those who have taken out loans and mortgages in the years following the crisis, however, have never been in a situation in which interest rates are high; in the past five years, the Euribor has not exceeded 5%, and in the past two it has remained in the negative.

"For ten years, interest rates have been relatively low, but prior to that, the Euribor had managed to increase to 6%," Tõrs noted. "The Bank of Estonia has likewise repeatedly said that if someone takes out a home loan for a period of over 20 years, they then have to take into consideration that interest rates can increase significantly compared to today's level."


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Editor: Aili Vahtla

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