Debtors can feel relief. Loan instalments remain unchanged?

30.11.2018 16:46|Marcin Lipka

"The Polish Central Statistical Office amazed economists with data on exceptionally low inflation in November. This quickly translated into the interest rate market. The chances of increasing the cost of loans at least until Q3, 2020 dropped significantly," writes Marcin Lipka, Conotoxia Senior Analyst.

In November, prices increased by only 1.2% compared to the same month last year. Such a low inflation rate had not been observed in Poland for almost two years. What is interesting, according to preliminary data of the Polish Central Statistical Office (GUS), a meagre price increase was achieved with increases in retail fuel prices exceeding 10%.

On the basis of the published data, we can also draw a further point. Core inflation, i.e. inflation excluding food and energy prices, has remained clearly below the 1% limit.

Loans continue to be cheap

The surprisingly slow pace of price increases, also those in terms of base prices, is an important piece of information for the Monetary Policy Council (MPC). Data for November may indicate that prices will grow slower than expected in the coming quarters. Recent suggestions from government representatives on keeping electricity prices unchanged for households and small and medium-sized enterprises may imply lower than expected inflation.

Today's publication also received a response from the interest rate market. FRA (Forward Rate Agreement) contracts, specifying what cost of credit values the market in the future, have fallen dramatically. It was only three weeks ago that FRA 21x24 (three-month interest rate for 21 months) was at 2.37%. Taking into account the quotations of the most current FRA 1x4 (three-month money cost per month), for less than two years, the market has valued an increase in interest rates by about 0.65 percentage points.

FRA 21x24 have been regularly decreasing in recent days, and today they drop of as much as 13 basis points to the level of 1.95 per cent. Currently, they value less than one increase of 0.25 percentage points, and that is only in 2020.

Perhaps there will be no rate hikes

If the market values only one increase in interest rates in less than two years and none in the next year, perhaps the MPC will not change monetary policy at all, and as a result, loan instalments will remain unchanged.

This is especially pleasing for those whose debt depends on a variable interest rate. Any increase would result in a higher cost of servicing credit, which usually hurts those who have supported themselves with external financing when buying real estate. This is also important news for those companies whose financing comes from loans or are planning to issue bonds.

However, as is usually the case, everyone cannot be satisfied. Those who keep savings in banks will not be able to see interest rate increases. It is also possible that banks will start to reduce interest rates, especially on long-term deposits.


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