Before 2009, the annual Euribor was never below 1.9 percent. The current interest rate is quite moderate in a historical perspective, writes HS economic editor Anni Lassila.
Zero interest rates a long season showed that people are basically optimists. Maybe too much.
The one-year euribor went negative in January 2016 and remained there until April 2022, i.e. for more than six years.
During that time, many young people had time to grow up without knowing anything about the normal interest rate. It’s really understandable that for this generation the idea of even three or four percent interest rates seemed quite utopian, and they didn’t know how to prepare for it.
Many young colleagues were also surprised by the banks’ so-called solvency stress tests, which were conducted on mortgage applicants at an interest rate of six percent. Why was such an impossibility even tested?
Zero interest rates gradually began to affect even those who had personal experience of high interest rates. The last time interest rates were above five percent was in 2008.
A young person thinks it’s an eternity, but people in their fifties paid their mortgages even then.
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Few thought about whether their own economy could withstand an increase in interest rates even by a couple of percent.
Still, many started investing with debt money in expensive new units without calculating at all how the rise in interest rates would affect the return on the investment.
Those who embraced a more spacious apartment put banks in competition to see which of them would grant the biggest mortgage. A lot of loans were received and a lot was taken out. Of course, it also contributed to the rise in house prices. Most people thought hedging against rising interest rates was pointless, because it cost extra money.
Few thought about whether their own economy could actually withstand an increase in interest rates by even a couple of percent or even a small change in income with those huge loan amounts.
Companies also got used to the fact that financing was cheap. The money was literally pouring into risky projects, as long as they were in trendy sectors, such as the green transition.
Too cheap money generally obscured the sense of risk. It is not healthy for the development of the economy that in pursuit of even a small return you have to take a big risk, and those who invest their money with low risk will not get any return on it.
The blurring of risk will inevitably cause valuation bubbles. The prices get too high and the repair shop is often painful.
Housing prices in Finland have also fallen clearly this year. Fortunately, they did not rise as sharply in recent years as, for example, in Sweden. That’s why the repair shop is hopefully smaller.
The stock and bond markets are also looking for a new balance, when even risk-free fixed-term deposits are getting 2–3 percent interest again.
Past the past year and a half has been rough for households in many ways, as interest rates and prices have risen sharply, but wages have risen more slowly.
Now, however, inflation is slowing down and wages have been raised. The rise in market interest rates has also slowed down, at least for now.
It’s still not worth waiting for interest rates to drop back to zero. In the end, no one knows for sure about the movements of interest rates, but they will only fall to zero if Western countries face yet another crisis, such as a global financial crisis, a new pandemic or a major war.
Nobody wants that.
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Tackling crises in indebted euro states has required a negative real interest rate.
Far on average, interest rates should settle at a so-called neutral level, which is neither stimulating to the economy nor restraining economic growth.
What matters is the real interest rate, which is obtained when inflation is subtracted from the nominal interest rate. In the euro area, the central bank’s deposit rate is now 4.25 percent, and in July the inflation rate in the euro area was over five, meaning that the real interest rate is still negative.
So what is the neutral real interest rate level? There is no exact answer because it depends on the economic situation. And there is little experience of the so-called normal situation in Europe during the last 15 years.
Tackling one of the successive crises in the indebted euro states has required a clearly negative real interest rate, and in addition, the central banks have revived the economy with exceptional measures, such as the purchase of securities.
Still, economic growth has not taken off.
The objective of the European Central Bank is to keep inflation at around two percent in the “medium term”. If and when this goal is reached again at some point, the neutral level of short-term interest rates could perhaps be around two percent, but only time will tell.
Wisdom maybe you can search in history. Before 2009, the annual Euribor was never below 1.9 percent, but its level varied between two and 5.5 percent.
The current interest rate of around four percent is therefore quite normal and quite moderate in a historical perspective.
It may be that the situation of the euro area economies has permanently weakened so that this interest rate is too high once inflation is slowed down to the target level.
It’s still good to get used to an interest rate of two or three percent in your own household. When you prefer to prepare for interest rates a bit unrealistically, you have room for maneuver in your own finances.
In too many families in the capital region, finances are tight and oxygen is low. Not because the income is low, but because the expenses – especially the interest expenses – are too high.
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