Montenegro, Interest rates will continue to rise in the future

Published on 9. February 2023., News

Expectations are that interest rates will continue to rise in the future, bearing in mind that the European Central Bank is trying to curb high inflation by increasing the reference rate, and in conditions of great uncertainty fueled by geopolitical tensions, Central Bank News reported.

The average nominal effective interest rate on newly approved loans in December last year was 6.55% and is the highest since 2018. In December 2021, it was 4.83%.

This interest on loans for working capital increased, in this comparative period, from 4.50 to 6.23%, for refinancing from 3.87 to 7.37%, for investment programs from 2.85 to 5.12%, for the purchase of fixed assets from 3.43 to 5.48%, for cash from 7.69 to 9.41%, for the purchase of a car from 6.67 to 7.75%, for housing loans from 4.55 to 5.59 %…

– The growth of interest rates is the result of several different influences. One of the reasons is the growth of Euribor, the reference interest rate on the interbank market, which is used when calculating interest on loans with a variable interest rate. Also, international factors influence the assessment of risk in Montenegro, and therefore banks increase interest rates on the market for this reason. We are talking about the perception of the country’s risk growth viewed through the prism of the price movement of government Eurobonds. Namely, the increased volatility on the financial markets, caused by the COVID-19 crisis and strongly encouraged by the situation in Ukraine in the previous period, led, among other things, to a drop in the market price of government bonds-debt securities of a large number of countries, including Montenegrin Eurobonds. This negative signal from the international financial market implies an increased country risk, which, combined with the growth of the Euribor, leads to an increase in interest rates – stated the CBCG.

The reference Interest rate Euribor had a negative value until June of last year, and now it is three percent.

In December, the total deposits in banks amounted to EUR 5.2 billion, they are at a historical maximum, and they are one billion more than a year ago.
– The data show that the growth of deposits is evident both among residents (domestic companies and citizens) and non-residents (foreign companies and citizens). Greater growth is present among residents, bearing in mind that in the structure of deposits, according to data at the end of December 2022, about 66% of total deposits refer to deposits of the resident non-financial sector (enterprises) and the population sector. This growth is at twice the level at the end of December 2022 compared to the one-year comparative period. Of this, deposits of the non-financial sector are dominantly growing (47% on an annual level comparing 2022 with 2021), compared to the annual growth of 2021/2020. When this sector recorded an increase of 18%. Also, there is an evident growth in the resident sector of the population (17.9% on an annual basis in the period 2022/2021), but it is quite stable compared to the annual growth in the period 2021/2020, when it was around 15% – they stated from the CBCG.

The CBCG sees the cause of such growth in the growth of trust in banks, as well as in the increase in wages, economic growth, foreign direct investments (FDI) and remittances from abroad.

– The increase in deposits, in addition to the tendency to save due to wage growth and economic activity (estimated growth rate for 2022 of over 7%), is also caused by a high inflow of foreign savings. Namely, the latest data show that the inflow of FDI in 2022 amounted to EUR 1.15 billion. Of this, EUR 219.4 million refers to investments in banks and domestic companies, EUR 448 million to the sale of real estate in Montenegro, EUR 401.54 million to intercompany debt, etc. The inflow of remittances, on the other hand, in the period January-September amounted to EUR 631.89 million, and also had an impact on the growth of deposits. The growth of deposits of non-residents is also evident, but to a much lesser extent, taking into account that they make up about 25% of total deposits at the end of December 2022. This growth amounted to about 13% on an annual basis. Also, the growth of non-resident deposits is slowing down compared to the period 2021/2020. Year, when it amounted to 51% – the CBCG announced.

Housing loans are on the decline due to rising real estate prices

The CBCG expects that there will be no significant drop in demand for loans due to the rise in interest rates.
– Based on the preliminary results of the survey on banks’ credit activity conducted in the fourth quarter of 2022, the banks’ expectations are that during the first quarter of 2023, the demand of companies for loans will grow, especially the demand of large companies. The demand of the population will increase when it comes to consumer and other loans, while the banks expect that the demand for housing loans will decrease, due to the worse general economic situation and the unfavorable situation on the real estate market – this institution stated.

It would be logical for savings interest rates to rise as well

The data also show that there was no increase in passive interest rates(interest on savings) during the last year, even a decrease in the average from 0.34 to 0.26% was recorded.

– The policy of passive interest rates is the responsibility of commercial banks and they create an offer in accordance with their policy and market conditions when it comes to lending conditions. The current propensity of companies and individuals to save is higher due to high uncertainty in the market, but also stability and trust in the banking system, which resulted in deposits at a historical maximum. In accordance with economic logic, it can be expected that with the start of the investment cycle and the reduction of risk, and in the environment of rising active interest rates on the market, there will also be the use of savings, and therefore banks could also increase passive rates in response to trends – according to the CBCG .