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The increase in the interest rate by the ECB, loans in Euros become even more expensive

2023-07-28 09:37:30Biznes SHKRUAR NGA REDAKSIA VOX
The increase in the interest rate by the ECB, loans in Euros become even more
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The European Central Bank on Thursday raised interest rates for the fifth time in a row this year.

The rate of the main financing instrument increased to the highest historical level of 4.25% (at least for the periods when the auction with fixed interest rates was applied). Since July of last year, the ECB has been pursuing an aggressive course of monetary tightening, aimed at reducing inflation near the 2% target.

In one year, the base rate has increased from 0 to 4.25%. The effects of the ECB's policies are increasingly being felt by borrowers in the European currency, in the Eurozone, but also outside it. These measures also have a great impact on the Albanian economy, where more than half of the loan portfolio is in foreign currency and mainly in Euros.

For existing borrowers in Euro, the increase in interest rates is transmitted through the reference indicator, Euribor, usually the one with 12-month maturity, which is the benchmark in long-term loans in Euro. On July 26, the 12-month Euribor reached 4.11%, the highest level since 2008.

Over the past 12 months, the Euribor has increased by more than three percentage points. The increase in Euribor is due to the revision of interest on loans with variable interest rates in Euro. Usually, the interest rate is revised once a year, but there are still cases when banks can foresee changes with a more frequent frequency, depending on the provisions of the loan contract.

For a typical loan with an interest rate composed of 12-month Euribor + a fixed margin of 4%, the total interest rate a year ago was around 5%, while today it is estimated at more than 8.1%.

For those borrowers whose income is in Euros, the increase in interest has been directly translated into an increase in expenses for monthly installments. Meanwhile, borrowers whose income is in Leka have generally amortized the effect of the increase in interest rates thanks to the appreciation of our currency against the Euro.

Currently, interest rates for loans with variable interest rates in Euro are even higher than those in Lek. The most common benchmark indicator for the Lek, the 12-month Bond yield is currently at 3.14%, approximately one percentage point less compared to the 12-month Euribor.

Furthermore, fixed interest rates above the Euro benchmark were generally higher, at least for loans granted until last year. This has happened because the Euribor has been in negative territory for years (it was calculated at 0 for determining loan interest rates).

For new loans, banks are generally balancing the effect of the increase in the benchmark indicator (Euriborit) by somewhat reducing fixed margins. In general, for new home purchase loans, banks are continuing to offer significantly lower interest rates, with fixed rates in the first years of the loan, in order to expand the portfolio.


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