Finnish borrowers will notice an interest rate hike by the ECB, experts predict

THE EUROPEAN The Central Bank (ECB) announced on Thursday that it was raising interest rates by 0.5 percentage points in a bid to contain inflation which has been well above the target level of 2%, after having settled to 8.6% in the euro zone in June. .

The first in more than a decade, the hike was bigger than expected as the monetary authority had indicated a month earlier that it would raise rates by 0.25 percentage points.

Tuuli Koivu, Nordea’s chief economist, told YLE on Thursday that the move, while more assertive than expected, will result in only a modest increase in Euribor rates. Euribor 12, the most common benchmark rate for home loans in Finland, had already priced in the expectation that interest rates would rise by one percentage point between July and September.

“Those expectations haven’t changed too much today, although the increase itself was bigger than expected,” she explained.

While she predicted that the monetary authority would raise rates by an additional 0.5 percentage points in 2023, she recalled that it was extremely difficult to make predictions about the future because the acceleration of inflation creates pressure to raise rates along with signs of an economic slowdown. do the opposite.

“China is doing worse than expected. There are uncertainties caused by the war, the drop in purchasing power which could cut off Europe’s economic growth and improve the situation,” Koivu said.

Nordea predicted in June that the 12-month Euribor could climb to around 2.75% by mid-2023. Koivu, however, pointed out that the forecast has since been revised down due to economic uncertainty, adding that she personally expects the rate to rise by just over 2% by July. 2023.

“[An increase of] a percentage point from today would be my own guess. I would say it goes above 2% rather than falling below,” she told the public broadcasting company.

The development, she said, will certainly have an impact on housing loans.

“Households now have to prepare for all sorts of scenarios. I’ve been an economist for over 20 years and I can’t remember ever seeing such uncertainty,” Koivu said. “Everyone should now think about how much interest rate risk they are willing to accept and whether it could be reduced with different types of hedging. You should really think about this stuff proactively.

Lippo Suominen, the chief strategist at S Bank, told Helsingin Sanomat that the ECB’s rate hike will lead to a “significant increase” in Euribor rates as of Friday. Although the increase has been largely priced in, its impacts can be significant at the individual level.

“On Friday, the new interest rate will be around 1.2% plus the [loan] margin. If your interest rate is then adjusted and you have only paid a margin of, say, 0.6% over the past two years, the end result will be 1.8%. That means your interest rate has tripled,” he pointed out.

He also recalled that interest rates had been exceptionally low for a considerable period of time.

“It has been said many times that zero interest rates are not the normal state of affairs. It was fun while it lasted, but hopefully not many people counted on it [continuing]he commented, adding that borrowers need not worry that interest rates could reach 1990s levels.

“Seeing us interest rates even as low as three or four percent seems like a really distant thought to us. But you have to be prepared for them to hit around 2 percent,” Suominen said.

Aleksi Teivainen – HT

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