Eamets: Interest Rate Decline Will Stimulate the Economy

Eesti Pank released statistics today on deposits and lending in January. The volume of deposits has grown substantially over the year, and today the total deposits of Estonian residents amount to 13.9 billion euros, which is 6.4% more than a year ago. The growth in deposit volume in January (plus 161 million euros) was also aided by the elimination of the tax deduction, as higher-paid individuals benefited more from it and did not immediately spend the additional money they received.

What is noteworthy is that the volume of term deposits decreased by 4.1%. This is a logical result, as interest rates have decreased significantly over the year. In January, the average interest rate on term deposits was 1.98, while a year ago it was 2.75%. It is unfortunate that people continue to keep their money in regular current accounts, on which banks typically do not pay interest. Fortunately, there are now exceptions and if desired, it is possible to earn interest on money sitting in a current account as well.

The positive side of falling interest rates is that loan interest rates have also fallen. While in January the average Estonian mortgage interest rate was 3.62%, it was 4.04% at the same time last year. Looking at the overall economic situation in Europe and especially at inflation indicators, it can be assumed that there will be no significant changes in the central bank's interest rates over the course of the year, so there is not much point in expecting interest rates to fall further in the near term. The average inflation in the euro area was 1.7% in January, which is slightly lower than the European Central Bank's target, and in such a case, the central bank has no reason to change interest rates.

The average amount of mortgages increased by 9.7% year-on-year. This growth likely points to two trends, first, real estate prices have started to grow slowly, and second, the average buyer prefers slightly more living space compared to before, which also increases the loan amount needed for the purchase. The recovery of the real estate market is also indicated by corporate lending statistics, as the volume of loans grew the most year-on-year in the construction and real estate sector. When demand grows, supply typically grows as well.

Estonians are diligent loan repayers. If we look at how much mortgage debt was more than 60 days overdue, that amount was 20 million euros, which represents only 0.2% of the total volume of mortgages. This is a very small share.

In summary, falling interest rates are very positive for the economy as a whole. The real estate and construction market is reviving, as mortgages have become cheaper. Companies have cheaper borrowing costs for investments, and consumption is also growing, as people keep less money in term deposits due to falling interest rates.