Bank warns of interest rate growth

The low interest rates on home loans and the stable consumer price index will not last forever, so Estonians with average income should think twice before getting themselves a credit card or leasing another car, the Bank of Estonia stated in its quarterly report.
Marten Ross, vice president of the Bank of Estonia, said that a reversal of economic fortunes in the EU and U.S.A. had not yet started, and therefore Estonian consumers are currently enjoying infra-low interest rates - starting at 3.9 percent - on mortgage loans.
"This is a kind of vicious circle. If the interest rates do not increase, Estonia's exports will continue to suffer. And if interest rates start to rise, families with average income will have to pay banks more, and general consumption is likely to decrease," he said.
The country's middle class will likely suffer from even a slight increase in the mortgage loan interest rates, according to the bank.
"Our calculations say that a 2 percent increase of the interest rate will increase the monthly loan payments by 13 percent. People have to take it into account," said Vahur Kraft, Bank of Estonia's president.
A family with a monthly net income of 7,000 kroons (447 euros) will have to cut its "other expenses" - money left after making the loan payment and paying communal expenses - by almost 50 percent should interest rates increase from 6 percent to 11 percent.
"Our warnings come out as a result of the meetings with commercial banks' representatives," said Kraft. "People have to remember not to borrow too much."
Still, Estonia has a major opportunity to improve its standard of living in the long term. Sovereign credit ratings are at an all-time high, and foreign markets have already begun to consider the country part of the EU.
"We must use this credit correctly. In some cases EU accession did not save a country from economic problems. Take Portugal or Greece, for example," said Ross.