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For two years, residents have been outraged by the record-breaking loan interest rates, which, for example, cost more than the property itself when taking out a home loan.
However, the rise in interest rates has achieved its goal – a decline is even planned next year.
The interest rate rose from 2.5 to 6.4 percent in 2 years.
Rokas Kaminskas, a doctoral student in economics at the ISM University of Management and Economics and a senior economist at the Bank of Lithuania, pointed out that lending rates in Lithuania have increased significantly in recent years.
In October, interest rates for new loans for residents were 5.9 percent and for companies even 6.4 percent:
“For comparison: a year ago these interest rates were around 4 percent, two years ago they were around 2.5 percent and even lower for residents. Such changes are extremely sudden, especially considering that in 2014-2021 interest rates fluctuated between 2 and 3 percent. on average.”
According to the interviewer’s interpretation, the increase in lending rates in Lithuania was largely due to the change in the monetary policy of the European Central Bank (ECB).
According to him, the extremely sudden change was due to the fact that most loans in Lithuania are issued with variable interest rates (as much as 98% for housing loans).
And this, according to the economist, means that the price of the loan consists of two parts: the bank’s margin and Euribor – the interbank interest rate (usually 3 or 6 months).
According to the economist’s interpretation, the margin when taking out a loan is determined over the entire period and is relatively constant, while Euribor is a variable part that can fluctuate significantly.
“The rise in Euribor interest rates in particular has led to an increase in loan interest rates in recent years. The Euribor, in turn, is closely linked to the ECB’s key interest rates and the associated short-term expectations.
Therefore, ECB monetary policy decisions can affect lending rates in Lithuania,” explained R. Kaminskas.
Is it possible that interest rates will rise again?
When asked what will determine the interest rate in 2024, Citadel Bank economist Aleksandr Izgorodin replied that inflation indicators, and more precisely the recent slowdown in inflation in the United States of America (USA) and the Eurozone, continue to be monitored.
According to the interviewee, central banks will pay particular attention to net inflation, i.e. inflation excluding food and energy prices.
“Recently, inflation rates have slowed significantly in both the US and the Eurozone, for example net inflation in the Eurozone (3.6% in November) is the lowest in 19 months.” US net inflation (4% in October) is the lowest in 25 months, i.e. 2 years.
“Central bank policies are bearing fruit, but post-Covid regulation of supply chains also had an impact on slowing inflation,” the economist shared his findings.
According to A. Izgorodin, changes in interest rates are also determined by economic activity. The expert pointed out that the situation in the USA and the Eurozone is different in this sense.
The US economy continues to grow and remains relatively resistant to interest rate increases as the US government has significantly increased government spending to offset the impact of interest rate increases on the economy.
And in the Eurozone the economy is balancing between recession and stagnation: “The situation is particularly difficult in the industrial and construction sectors.” In Germany, for example, around 45 percent of construction companies complain about a lack of orders – more than during the global financial crisis.”
However, the interviewer assured that the market does not expect further interest rate increases in either the USA or the Eurozone.
“The market does not see further rate hikes due to slowing inflation in the US and Eurozone and the fact that previous rate hikes continue to weigh on the US and Eurozone economies.”
“That is, when interest rates reach high levels, central banks will tend to monitor how previously made decisions to raise interest rates affect inflation and economic activity,” the economist taught.
When do interest rates start to fall?
The doctoral student from the ISM University of Management and Economics stated that the ECB’s key interest rate was increased to curb extremely high inflation.
“As of 2022 the interest rate on deposit options increased from -0.5 percent in July. up to 4 percent and led to similar changes in Euribor.
It was decided to raise interest rates so quickly after inflation (which reached 10% in the Eurozone and over 20% in Lithuania in October 2022) and feared that it would deviate from the ECB’s target of 2%. at this level for a longer period of time,” commented R. Kaminskas.
He mentioned that higher interest rates help slow the economy somewhat, cool the labor market and slow price growth.
According to the economist, the Governing Council currently estimates that the existing 4% interest rate level must be maintained for some time in order to achieve a sustainable return to the inflation target.
According to the representative of the bank “Citadele”, the decrease in inflation is associated with the decrease in interest rates, that is, if inflation decreases, interest rates will also decrease.
“With inflation slowing significantly in the Eurozone and the US, the market is now competing for the Fed and ECB’s interest rate cut forecasts. The market sees 52 percent. the probability that the Fed will cut rates in 2024 is in March, and the May rate cut is fully included.
The market sees 61 percent for the ECB. the probability that the ECB will start cutting interest rates in March in 2024, the reduction in April is fully included,” said A. Izgorodin.
However, he pointed out that not only inflation but also economic activity has an influence on interest rate cuts.
In this case, according to the interviewee, attention should be paid to the weak economic activity in the Eurozone, particularly in German industry and the construction sector.
How much in 2024 will interest rates be reduced?
According to the representative of Citadele Bank, it is expected that the interest burden will gradually decrease.
A. Izgorodin stated that currently 3 months. Euribor reaches 3.950%, 6 months. – 3.935 percent
“The latest forecasts show that in 2024 3 months in June Euribor will fall to 3.32%, 6 months. The Euribor will fall to 3.25%.
At that time, the market predicted that for 2024 3 months in December Euribor will reach 2.66%, 6 months. “Euribor will reach 2.69 percent,” the economist shared his forecasts.
And according to R. Kaminskas, interest rates may fall in the future, but when this happens depends on the economic outlook and inflation dynamics in the Eurozone:
“For example, data showing sluggish economic and wage growth and a faster-than-expected decline in inflation could lead to faster interest rate cuts.” Conversely, if it turns out that high inflation can last longer, higher interest rates would be supported.”
According to the economist, investors in financial markets currently estimate that in 2024 interest rates could fall by around 150 basis points (or 1.5 percent interest).
If this happens, according to the interlocutor’s interpretation, Euribor and loan interest rates could fall by a similar amount: “However, this is only the vision of market participants.” The ECB Council will make decisions at each meeting based on the most current data and forecasts .”
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