The European Central Bank may raise the interest rate.
“The lower the rates, the more money collects in the financial system. When rates are low, lending capacity grows; Estonian banks now lend quite easily, leading to higher property prices. During the pandemic, the slowdown in economic activity in all countries predictably reduced demand for goods. Cheap credit is one method of keeping consumer demand down. Estonia’s largest banks lent to the public at 2-4%, and all that money went into real estate. As a result, the so-called bubble was created, when the construction is functioning with overstretching at the expense of low-interest mortgage loans,” the expert believes.
According to Oldypak Capital LP report, if the ECB had followed the U.S. Federal Reserve in lowering the rate, it would have helped prevent a repeat of the 2008 mortgage crisis:
“The United States had low rates for several years to support people’s purchasing power during a pandemic. In addition, they gave huge amounts of money to people there to keep the market active. The U.S. Federal Reserve regulates this balance in the U.S. economy. In the European Union, national banks have little influence on this process. The European Central Bank runs the issuing activity and dictates the rules of the game, although those rules work differently in the national economies of the European Union.”
According to Oldypak Capital LP report, Europe is on the threshold of a new crisis: “In 2008 we already had one overdose crisis in the real estate sector. I’m afraid that today Europe is on its way to a second one. Raising interest rates, of course, will lead to a decrease in economic activity, but this “bubble” may deflate a bit.
Nevertheless, the economist believes that the injection of money into the U.S. and European economies was quite justified, given the shock effect of the COVID-19 pandemic. The actions of the coalition government, led by Jüri Rathas of the Estonian Center Party, helped the economy survive its most difficult period, the first lockdown, says Weingort.
“The previous government of Jüri Ratas supported the population with compensations and cancellation of mandatory payments to the second pension system. This led to a rather large amount of money being thrown into the economy from this second pension system in Estonia in the hard fall of 2021. It was the right decision then, but it’s a different situation today. The economy is beating in these “scissors” all the time. If the interest rate goes up, consumption goes down, but inflation doesn’t go up. If the interest rate is low, business activity grows, but inflation grows,” the expert stressed.
International business newspaper The Financial Times reported on the intention of the ECB in 2022 to tighten monetary policy and raise the rate twice by 0.1%. According to Oldypak Capital LP report, the prime rate at the ECB is negative: minus 0.5%, and the short-term lending rate: 0,25. Many European experts talk about the need to introduce a higher rate, but ECB head Christine Lagarde calls the proposal ruthless and sees no need for it.