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- Mild rise in interest rates over the past year has continued into 2023.
- Housing loans have grown more slowly compared to loans to enterprises.
- The ECB raised the rate by 50 basis points at the last meeting of the Governing Council and announced that further decisions would depend on the movement of inflation expectations and new economic and financial data.
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Although interest rates have risen since the beginning of the year in Croatia, the Croatian Banking Association (HUB) has confirmed our previously established thesis that due to the introduction of the euro, they will still rise more slowly compared to other euro area countries. This growth, they note at HUB, is more pronounced for loans to non-financial enterprises than for loans to households.
– Due to the release of new liquidity, reduced regulatory costs, and country risk, interest rates in Croatia are currently lower compared to most euro area countries, especially in comparison to countries that are not and do not intend to join the euro area – they state from HUB.
According to the latest available data from the Croatian National Bank (HNB), in January 2023, the average interest rate for euro housing loans was 2.89 percent, which is an increase of 0.32 percentage points compared to the same period last year. The average interest rate for non-purpose and other euro loans in January this year was 5.36 percent, which is an increase of 0.95 percentage points compared to January 2022.
As mentioned, interest rates for enterprises have generally risen more. For short-term loans, the average interest rate in January this year was 2.84 percent, which is 1.92 percentage points higher than in January 2022. For long-term loans, the average was 3.88 percent, which is an increase of 1.52 percentage points compared to January 2022. HUB emphasizes that interest rates on euro loans to non-financial enterprises at the end of last year and the beginning of this year were among the most favorable in the European Union, resulting in a strong increase in the amount of loans to enterprises by about 20 percent year-on-year. Thanks to this, Croatia ranks at the very top among EU member states when it comes to interest rates.
At Erste&Steiermärskische Bank, they remind that in the part of business with the economy, interest rates recorded a certain increase already during 2022. They emphasize that the increase stemmed from the rise in the variable part of the interest rate linked to the reference rate EURIBOR, and this trend has continued since the beginning of this year.
Oscillations of the Reference Rate
– In accordance with announcements of expected interest rate increases, which will occur in part, although to a lesser extent compared to other comparable countries due to the positive effects of the introduction of the euro, interest rates on new housing loans have been aligned since January 1 with the values of the new variable parameter, 6m EURIBOR. They range, depending on the model of the housing loan, from 2.90 percent to 3.74 percent, representing an increase of 0.5 percentage points compared to earlier. It is important to emphasize that the change occurred exclusively for new housing loans, meaning that the conditions for existing housing loans have not changed. Also, interest rates on new cash loans have not changed so far and currently amount to 4.99 percent for standard models, and for models with repayment insurance, 4.49 percent – they state from Erste&Steiermärskische Bank.
At Addiko Bank, they say that depending on the conditions, interest rates for citizens range from 5.50 percent to 6.90 percent, while for small and medium-sized enterprises, they range from four percent to six percent. This means, they add, that interest rates have increased by 0.3 percent since January 1 of this year.
At Zagrebačka Bank, they say that interest rates on existing loans to citizens have not changed compared to January 1, 2023. Zaba currently offers housing loans with a fixed interest rate (up to 15 years) and loans where the interest rate is fixed for a certain period, after which it becomes variable for the remaining repayment period (up to 30 years). Interest rates on housing loans range from 3.19 percent annually, while cash loans are approved with a fixed interest rate for the entire repayment period of 5.99 percent annually.
– Zagrebačka Bank has not increased interest rates on existing loans to enterprises. The change in interest rates depends solely on the oscillations of the reference rate EURIBOR since interest rates on loans to legal entities in euros are linked to EURIBOR. If the European Central Bank continues to tighten monetary policy, which seems likely at this moment, it is probable that mild pressures will affect the rise in interest rates – they say at Zagrebačka Bank.
And what about interest rates on savings? At HUB, they say that there have only been indications of growth, but there is no significant pressure to raise interest rates on savings. However, they add, this is expected given the high liquidity that has further increased in the process of introducing the euro. However, just like with interest rates on loans, if the European Central Bank continues to tighten monetary policy, pressures for rising interest rates on deposits will continue this year. It is difficult to predict, they note at HUB, when this will exactly happen and to what extent, as a very large number of factors influence interest rates and inflation, each of which is difficult to predict individually.
– For the main sources of funds that credit institutions obtain from the household sector in January 2023, the average interest rate on time deposits was 0.15 percent, which is an increase of 0.7 percentage points compared to January 2022. The average interest rate on time deposits for non-financial enterprises in January 2023 was 1.29 percent, which is a significant increase of 1.22 percentage points year-on-year – they say at HUB.
Liquidity of the Banking System
Addiko Bank has not recently changed interest rates on savings, nor has Zagrebačka Bank, which, in addition to offering time deposits, savings-investment products, and a targeted yield fund established in the last quarter of last year, now offers two new funds – in euros and US dollars, which allow interested investors to achieve yields starting from 2.5 percent annually maturing in 2027 (euro fund) and maturing in 2026 (dollar fund) by investing in government bonds of EU countries and the USA. The initial offer of shares started on March 23, 2023, and will last until April 21, after which it will no longer be possible to invest in the fund.
No one wants to estimate what will happen next, although it is expected that the ECB will continue its policy of raising key interest rates. As they say at HUB, the ECB raised the rate by 50 basis points (0.5 percent) at the last meeting of the Governing Council and announced that further decisions would depend on the movement of inflation expectations and new economic and financial data. However, at Addiko Bank, they do not expect significant changes. At Erste&Steiermärskische Bank, they also expect a continued mild rise in interest rates compared to some other European countries, not only due to the effect of the introduction of the euro in Croatia, which has eliminated currency risk and reduced the risk premium, but also due to the fact that the banking system in Croatia has already been highly liquid for some time.
When it comes to interest rates on deposits, the rise in reference interest rates certainly creates a certain basis for their gradual increase in the future period.
– Considering the fact that the trend of interest rates is very likely to be upward in the coming years, the general advice or suggestion to clients, primarily those who use loans with a contracted variable interest rate, would be to increase their orientation towards protection against such potential increases, or to analyze the available options that are at their disposal in that segment. In order to secure against a potential rise in the reference interest rate in the future, Erste Bank has been offering the possibility of changing the type of interest rate from variable to fixed or combined interest rate for many years, without charging a fee for the change – they say at that bank.
