Bank analysts anticipate modest rise in interest rates

"From the perspective of the housing market, I would hope for a speedy increase"

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Helsingin Sanomat invited four senior analysts and economists from Finnish high-street banks to forecast where interest rates would be in two years from now.
      All four anticipate that the European Central Bank will step in before long and that the the 12-month Euribor, the most common reference rate to which Finnish housing loans are linked, will move steadily upwards in the period to August 2007.
      The economists nevertheless say that the changes would be so small that they are unlikely to do much to cool the overheated property market.
      According to Timo Lindholm, Chief Economist at OKOBank, it will take a good long while before interest rates are at the "normal level" of around four percent or just below this.
      Lindholm expressed the hope that rates would rise more briskly: "From the perspective of the housing market, I would hope to see a speedy rise in interest rates. Things are moving too fast on the housing front right now, and in the longer term this is in nobody's interests."
     
A number of factors could intervene to torpedo Lindholm's wishes: weak German economic growth, soaring crude oil prices, or even the gradual slackening of the pace of the Asian economic machine. All these would influence the ECB, which determines interest rates across the eurozone.
      In fact Lindholm is the most cautious of all the economists in his predictions for interest rate movement. He envisages that the 12-month Euribor, currently standing at 2.20%, will have crept up to 2.75% by August 2007.
     
For home-buyers, a 1%-point rise in the rate would mean an additional EUR 83 a month would become payable on a loan of EUR 100,000.
      In part as a result of sustained low interest levels, Finns have been taking out housing loans at a prolific rate during the first years of the new century.
      According to Bank of Finland statistics, the overall amount of housing debt has has shot up from around EUR 25 billion in late 2000 to a situation where the current value of Finns' housing loans is more than EUR 45 billion.
     
As recently as last spring, some economists were forecasting that the ECB might step in to lower rates further, in the wake of dire news about the stagnant German economy. Now the reports coming out of Germany are more positive, and all talk of a rate reduction has ceased.
     
Chief Economist Timo Tyrväinen of Aktia Bank is among those who have been looking to an ECB rate hike for some while. He believes action postponed until this time next year would be hopelessly late.
      At the same time, Tyrväinen does not believe interest movements will have any immediate effect on the Finnish housing market. For all that, he foresees some kind of inevitable cooling-off as buyers simply get fed up with galloping prices.
      Tyrväinen's view is that whilst people are able to cope with their current debt burdens, from the broader economic perspective there is basically no sense in having such a large part of disposable income going into housing costs.
     
Tarja Heinonen from Sampo nevertheless believes that the housing market will remain buoyant. She considers that Finnish housing loans are still in reasonable proportion to disposable household income. Even Heinonen thinks, however, that the spiralling prices of apartments will taper off somewhat.
      Heinonen foresees a rise in rates from next year, as European economic growth picks up on the back of increased business confidence and solid export results owing to U.S. and Asian expansion.
     
All four economists agree that the biggest uncertainty factor in any discussion of interest rate trends is the price of crude oil.
      Nordea's Chief Analyst Roger Wessman, who anticipates rates could hit 3.75% by August 2007, assumes that the oil market will chill out already before year's end and that economic growth will strengthen.
      The current crude price, hovering above USD 65 a barrel, is so high it is hard to imagine the situation can be sustained very long, in his view.
      Wessman envisages that any upward movement in rates will kick in from next summer and autumn.


Previously in HS International Edition:
  Interest rates on housing loans continue to fall; banks compete fiercely for best customers (29.3.2004)

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