Financial stability is in less abundance now than it was, the head of the largest lender in Estonia, Swedbank, says, while in adapting to the new norms after a period of getting used to growth, the economy will need to be more flexible.
Olavi Lepp, Swedbank’s CEO, said that Estonians had become less well-off in the context of both deposits and salaries, as a result of diminished purchasing power.
“The Estonian person has been very flexible, but for the last 12 years things have gone up on average, now is the time to practice how to cope with setbacks,” said Lepp.
“Our bank’s customers have a relatively large balance of retail deposits, but there are those who do not have it, but they have an income. Now the question is whether the number of those who lack income in the background of rising prices will increase,” he said.
At the same time, the recent 0.25% rise in interest rates announced by European Central Bank (ECB) President Christine Lagarde, the first in 11 years, is not likely to change much and will probably be followed by a hike of 0.5% in September.
This also relates to the broader picture in terms of belonging to the Eurozone, he added. “Estonia cannot do anything on its own, because we are a part of the Eurozone, where we have one central interest rate. From thereon in, it depends on where the average inflation rate in Europe is. If the average European inflation rate is 7% and is forecast at 3.5% for next year, it is possible that base interest rates will be hiked, but will remain at 1%.”
The rise in interest rates also pushes the balance towards depositors, in order to preserve the value of money, he added.
“It has not been standard for us to have been in a negative interest rate environment for six or seven years – that is, the interests of depositors have been put on the back burner,” Lepp said.
“In the case of all new loans issued by Swedbank, the customer’s income is checked against the loan service limits that the Bank of Estonia has set for us, and we look to ensure that the customer can service the loan even if the interest rate rises to six,” said Lepp. “However, this formula is far from perfect. While we can see that prices are rising in every area, the 6-% interest rate is only one component. The 1% interest rate is fine”.
Even higher interest rate rises in three or four years’ time are also viable, Lepp added.
“I don’t know what’s will be around the corner. You have to be flexible both as an individual and as an entrepreneur,” Lepp went on.
State aid should be targeted on those who need it the most rather than wholesale, he added, noting that this approach would include helping business competitiveness rather than all private householders.
“At present, the situation is not easy for entrepreneurs and the autumn is being looked at apprehensively,” he added.
The ECB announced on June 9 it would raise interest rates in a bid to bring down soaring prices across the eurozone.
Estonia’s own inflation rate has reached the 20% mark now, and as of April was already the highest in the Eurozone. (ERR/Business World Magazine)
