Eamets: Markets are hesitant about further rate cuts, analysts are not

The European Central Bank decided today to lower the deposit rate again, which in turn affects euribor, which all Estonian borrowers are linked to. The interest rate was cut by 0.25 percentage points and as of today it stands at 2%. This is an expected decision.

What is interesting about this cut is that the six-month euribor is still above 2%, whereas in previous periods markets have expected further cuts and euribor has already been below the expected new deposit base rate before the decision was made. For example, when it was previously expected that the central bank's rate would fall to 2.25 percent, euribor was already at 2.2% the day before.

If the situation stabilizes and no further cuts are expected, then it is logical that the interbank lending rate is higher than the deposit rate that the central bank pays so that large commercial banks would keep their money at the central bank. If the deposit rate is higher than the lending rate at which banks lend to each other (euribor), then it is indeed more profitable to keep money at the central bank rather than lend it to other banks. The deposit rate is usually higher than euribor when it is expected that the central bank will lower it again soon. Currently, the markets seem to believe that there will be no cut in the near future.

Many analysts, on the other hand, believe that at least one more central bank rate cut will come this year, possibly two. This would mean that euribor would be somewhere between 1.5-1.7% by the end of the year. Since the inflation level has now reached the central bank's target level (2%), it seems interest rates should no longer be cut.