Euribor is rising and interest margins are falling
Economist at Eesti Pank
Euribor has risen fast in recent months. The six-month Euribor, which is used as the base for the majority of housing loans and corporate loans issued by commercial banks operating in Estonia, was still negative at the start of June, but had already risen to 2% by the middle of October. Euribor is rising because inflation remains high throughout the euro area, and the Governing Council of the European Central Bank is tackling it by raising the interest rates at which commercial banks can deposit money at the central bank or borrow from it. This then raises the interest rates at which commercial banks in the euro area are ready to lend to one another, and which is shown by Euribor.
At the same time, the interest margins added to Euribor for housing loans and car leases have become a little smaller. The interest margin for newly issued housing loans and for housing loans where changes were made to existing contracts fell to an average of 1.6% in September this year from 2.1% a year earlier. The interest margin on newly issued housing loans alone fell at the same time from 2% a year ago to 1.8% in September this year. Interest margins are narrowing because the banks operating in Estonia receive a large part of their funding from demand deposits, which have an interest rate close to zero that has not notably risen. This means that the interest costs of the banks in Estonia have not particularly increased. The rise in Euribor has however helped them earn more interest income from lending. This has allowed banks to reduce the interest margins on their loans without losing any profits, which they have done because of tighter competition. Competition has tightened because some banks have ambitious plans for growth.
The interest margins on loans issued to businesses have remained about the same as they were a year ago. Given that the outlook for the economy has deteriorated over the past year and risks have increased, interest margins remaining the same is undoubtedly good news for companies. It is probable that some other lending conditions have tightened a little, and that this has combined with the rise in Euribor to bring down the assessments that companies have of the lending market. Access to loans is generally still good at present. This is shown by the rapid growth in lending for example, as the yearly growth in the corporate loan and lease portfolio accelerated to 12.5% in September. Real estate companies stand out particularly among others for their better opinion about lending and their rapid growth in borrowing.
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