Economists: The Era of Expensive Loans Is Returning – and Even Those Without Loans Will Feel It

The European Central Bank has raised its key interest rates for the second time this year. According to economists, this is a signal that the era of expensive loans is returning, and even those who do not have loans will feel the effects. For the economy, this could herald stagnation. Moreover, it is unclear whether higher interest rates will actually curb inflation.

The amount of construction taking place in a city is one of the indicators of whether life is improving or has already started moving in the opposite direction.

A lot is built when a lot is bought.

However, housing demand also depends on how much money a person will have to pay for a loan. The Governing Council of the European Central Bank has decided that from now on, it will be more.

Key interest rates were increased by a quarter of a percentage point to 2.5%.

On top of this figure comes the bank's earnings - the margin.

So every month, several dozen euros more will come out of people's pockets.

“For someone who has a loan, current costs and expenses increase. If we are talking about people who are still considering taking out a new loan, they have to think about the higher instalment that awaits them, or even a larger down payment,” comments Rytis Krušinskas, Professor of Finance at the School of Economics and Business at Kaunas University of Technology (KTU).

“The message has a somewhat negative tone. In the sense that people still remember quite recently what the market was like when EURIBOR reached 4%. Of course, we are not yet heading all the way to that figure, but the direction is quite clear,” says Arnoldas Antanavičius, Head of Business Development at Profitus.

Interest rates were at 4% in 2023-2024.

One in six households in Lithuania has a mortgage. But they will not be the only ones to feel the change in interest rates.

As interest rates rise, other loans also become more expensive. For example, the amount paid for car leasing increases.

Borrowing also becomes more expensive for businesses.

“This will, of course, also be relevant for businesses. For businesses that borrow for expansion and borrow for growth. In the long term, this will probably also be factored into the prices of services,” says Mindaugas Statulevičius, President of the Lithuanian Real Estate Development Association.

Economist R. Krušinskas says that when borrowing becomes more expensive, businesses change their plans. They may reconsider salary increases for employees or slow down investments because the time it takes for those investments to pay off becomes longer.

“Over the past 5-6 years, we have had both ups and downs. But overall, this is already a signal to the market that we are once again starting to climb that hill where life, loans and borrowed money become more expensive,” he says.

The European Central Bank justifies its decision to raise interest rates by saying that it is now necessary to curb rising inflation. Annual inflation in the euro area has exceeded 3%.

“Average inflation in the euro area in August was 3.3%. In Lithuania, it was 6%. I keep coming back to that figure. And it is somewhat worrying, because this inflation rate being twice as high tells us that we are climbing that hill again, but we are climbing faster,” says R. Krušinskas.

This means that Lithuanians' purchasing power is declining faster than that of other Europeans.

For the economy, this is said not to mean stagnation, but the news is still bad.

As interest rates rise, the state also needs more money.

Last year, EUR 500 million was allocated to service the debt. This year, EUR 700 million has been planned, while next year as much as EUR 1 billion will be needed.

The rise in interest rates may not be over yet.

“The European Central Bank is expected to meet two more times this year - in October and December. What it will decide remains a question. The Governor of the Bank of Lithuania predicts that interest rates will most likely be raised once again.

Market expectations are that interest rates will rise to 3%. But whether the bank's efforts to control inflation in this way will work is said to remain an open question.

Oil has already reached a price of one hundred dollars. Electricity and gas have become more expensive.

Property market expert A. Antanavičius says that a couple of years ago it was not a bank decision that brought inflation down.

“Things only began to normalise when certain solutions emerged in the geopolitical situation, supply chain issues were resolved, and trade flows were redirected. The markets adjusted. Inflation subsided, and then the ECB was free to lower interest rates. Something similar could happen in this case,” says A. Antanavičius, Head of Business Development at Profitus.

But there are also two pieces of good news related to rising interest rates. One concerns housing prices.

“What could happen now, as EURIBOR rises, is that price growth will no longer be double-digit, but single-digit,” says A. Antanavičius.

The other piece of good news is for those who have savings. Banks should raise interest rates on deposits.

Article link: https://www.lrt.lt/naujienos/verslas/4/3048468/ekonomistai-grizta-brangiu-paskolu-metas-ir-tai-pajus-net-ir-ju-neturintieji