Depositors win and borrowers lose from the rise in interest rates

Autori Taavi Raudsaar pilt

Taavi Raudsaar

Economist at Eesti Pank



Several companies and households have taken a cautionary stance in making decisions about investment and borrowing because of the uncertainty about the outlook for the economy and the rapid rise in prices and interest rates. Fewer loans have in consequence been taken in the first half of the year, and this is especially so for long-term loans. Companies took 14% fewer long-term loans in the first quarter of 2023 than they did a year earlier, while households took 20% fewer housing loans. It should be noted for 2022 that the growth in loans was too fast given the capacity for growth in the Estonian economy, and so some slowdown in credit growth is to be welcomed. The capacity of the banks to lend is good moving forwards, and the banks would be pleased to see their loan portfolios grow. The current level of interest rates should not be excessive for companies and households in Estonia, and demand for loans and growth in them should increase again as the outlook for the economy clears and interest rates stabilise. Commercial banks have already spotted the first signs of demand for loans recovering.

Companies and households have so far coped well with meeting their financial liabilities. At the end of March, 0.3% of corporate loans, 0.12% of housing loans, and 1.3% of other household loans were overdue more than 60 days. There has been some increase in this figure for other household loans, but the change has not been major. According to banks, there have only been a few applications for payment holidays, which also indicates that there have been no serious problems with loan repayments. Higher interest rates have undoubtedly put greater pressure on the budgets of borrowers, but non-performing loans have so far been rare for a few reasons. One is that corporate sales revenues and profits were growing well until recently. The ability of households to pay their loans depends, above all, on whether they are employed, and unemployment has remained low despite ticking up a little. A second reason is that the rise in euribor has not yet passed over in full into loan repayments, as the interest payments on most loans taken out earlier are recalculated every six months. A third reason is that borrowers have built up financial buffers in recent years as the economy has performed well and incomes have risen.

The direct winners from higher monetary policy interest rates are depositors. The average interest rate on corporate term deposits rose to 2.2% in March, and the rate for households rose to 2.4%. Some banks are even offering interest rates above 3% for term deposits of over a year. The amount held in term deposits has consequently started to increase at the expense of demand deposits, which is money that is simply sitting on accounts. The term deposits of Estonian companies and households had almost doubled over the year by the end of March to around 3.5 billion euros. As monetary policy interest rates continue to rise, so may the interest rates on term deposits be expected to rise as well. The interest rates on term deposits and the interest earned from those deposits also depend on the choices made by people and businesses – about whether to continue holding their deposits mainly on current accounts or to start using term deposits more –, which would put pressure on banks to compete between themselves to tempt client deposits by offering higher interest rates.


See also: STATISTICAL RELEASE. Term deposits at credit institutions have grown substantially

Additional information:
Evelin Jürisson
Eesti Pank
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