Inflation is coming down from its high level and has been encouraged in this by the central bank raising interest rates sharply. Higher interest rates mean that borrowing is more expensive for households and businesses, but they have also made deposits an attractive option for investment said Deputy Governor of Eesti Pank Veiko Tali at a conference hosted by the newspaper Delovõje Vedomosti.

The term deposits of households and companies have grown rapidly in volume at the expense of demand deposits, and they stood at 6 billion euros in October. The amount held in term deposits has almost tripled over the year. “Deposits have become a meaningful option for investment, especially because they offer a good balance of risk and reward”, said Mr Tali. He observed that there is further room for growth despite the sharp increase that there has already been, but that this will depend above all on how the holders of the deposits choose to act. Term deposits are now about 25% of corporate deposits and 30% of private deposits. When interest rates were last as high as they are now in 2008-2010, term deposits were 40% of corporate deposits and 60% of private deposits.

The average interest rate on the term deposits of households reached 4% in October and they have hit 4.5% or higher for longer deposits or in promotional campaigns. The interest rates in Estonia on private term deposits are the highest in the euro area, while those on corporate deposits are at the euro area average.

The rise in Euribor prompted by the rise in the key interest rates of the central bank has by now caused interest rates on loans to more than double. This has made the financial position of both companies and households more difficult and has made it harder for them to cope, but they have so far managed well with repaying their loans. Less than 10% of companies consider that their main concern currently is financial problems, and only a few companies have fallen into difficulties with loan repayments. Households have been helped by unemployment remaining low while savings and wage grow. Recent research shows that the biggest worry for seven people in ten is general high inflation, while rising interest rates and loan payments is the main worry for only one in ten.

“The rate of problem loans in Estonia is currently very low”, said Mr Tali. Only 0.2% of corporate loans and 0.1% of the housing loans of households were overdue by more than 60 days in October. “The latest analysis by Eesti Pank shows that the amount of problem loans will probably start to increase a little in the near future, but the level will still remain very low. We do not see any broader threat from this to the economy and the financial system”, he added.

Credit growth has slowed but it has been faster in Estonia than in the euro area on average. There are wide differences between sectors, as growth remains fast in the loan portfolios of energy, and information and communications, but has slowed in those of manufacturing and logistics. Around a quarter fewer housing loans have been issued than at the same time a year ago, but they are at a similar level to where they were in the years before the pandemic, when growth was sustainable and at times fast.

The European Central Bank has raised interest rates in the euro area on ten consecutive occasions since last July, increasing them from -0.5% to 4%. Initial estimates show that inflation in the euro area fell from 2.9% in October to 2.4% in November, and that core inflation without the prices of energy and food fell by more than expected. “Inflation is coming down, but before we can think about cutting interest rates we must be convinced that inflation has been brought firmly under control”, said Mr Tali. The latest forecast from the European Central Bank expects that inflation will fall to close to 2% in 2025.

For further information:
Viljar Rääsk
Head of Communications
Eesti Pank
5275 055
Email: [email protected]
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