Economist expects Euribor to rise further as ECB considers another rate hike

Economist Kristjan Liivamägi expects the European Central Bank to raise interest rates again this year, which would push Euribor higher, ERR reported.

The six-month Euribor rate has risen to 3% from 2% a year ago. Liivamägi said the increase, combined with growth in lending, was the main reason banks’ net profits had grown.

He said the stronger economic environment in Estonia had enabled banks to issue more loans while keeping loan portfolios relatively healthy. LHV had also earned additional income by reversing loan-loss provisions, he said. The impact of these factors had so far been felt mainly by smaller banks, with large banks’ net profits also expected to rise soon.

Loan interest margins at Estonian banks have fallen as competition has increased, Liivamägi said. However, returns on equity remain higher than at European banks: while European banks record returns of 10% to 15%, Coop Pank’s return was nearly 15% and LHV’s was 19%. He said there was room for Estonian banks to reduce their margins further.

Financial markets expect interest rates to stay at current levels or rise, Liivamägi said, pointing to inflation in Europe above the European Central Bank’s 2% target. He said borrowers and businesses should prepare for Euribor to remain around 3% or slightly higher in the coming years.

Liivamägi also expects taxing banks to become a political issue again ahead of the next parliamentary elections. Whether the debate leads to action will depend partly on the election, he said.