Hansapank was the first to announce that they were raising interest rates and Uhispank followed suit later in the week. The rate increases will affect both loans and deposits and reflect the difficult financial situation in Estonia and the problems banks are having in obtaining foreign loans.
"Loan interests were increased, because of a tightened market situation," said Margus Kisel, analyst with Hansapank. "We consider today's economic situation more risky than before and it means also higher interest rates."
Hansapank released the news on Monday, Oct. 12 and Uhispank followed suit later in the week. According to Eero Raun, of the public relations department of Uhispank, banks of equal size and stature inevitably have similar interest rates.
"It is quite logical that both of them are having equal category of prices," said Raun.
The smaller banks will almost certainly be forced to give depositors an even higher rate of interest in order to entice them away from the more established and secure Hansapank and Uhispank.
"The smaller banks will be forced to increase their rates as well," said Toomas Reisenbuk, banking analyst with Hansa Investments.
The main reason for the increase in deposit rates is to entice people to save and as a result, increase the amount of money that the banks have to lend.
"Until today, depositing in Estonia is on a quite low level, if we compare it with developed countries. And there is no other way to increase domestic savings, than to give additional value to depositors and increase interest rates," said Kisel.
Both banks cite the need for deposits to keep pace with loans as a main reason for the interest rate increase.
"The growth of deposits has to be before growth of loans," said Raun.
In the past, Estonian banks relied on foreign loans that were easy to obtain, in order to finance their lending. These loans usually had a favorable interest rate so the banks were able to pass these savings along to their customers in order to encourage borrowing.
With the downturn in the world economy, foreign lenders are more reluctant to lend money to emerging markets such as Estonia and are generally doing so at less favorable rates. Estonian banks have been forced to make loans using funds from deposits in their banks. Since their deposits have traditionally been low, they must increase deposits before increasing loans.
"Foreign borrowing has been getting really scarce for the banks," said Peter Treialt, with Hansa Investments. Interest rates probably won't come back down until foreign credit lines open up again, according to Treialt. "That won't happen again in the next half year."
Interest rates have been steadily increasing for the past year. The last time Hansapank interest rates were this high was December 1995, and then they decreased sharply. On Sept. 23 of last year, Hansapank was charging only 11.25 percent base interest.
The interest rate increase at Hansapank will affect all types of deposits and loans. Hansapank mostly lends money to corporate clients, according to Kisel. Almost all loans to individuals are in the form of student loans.
The base interest rate for Hansapank loans increased from 15.5 percent, as of Aug. 26, to 17 percent.