Fear of loans again, interest rates to rise in July

The European Central Bank (ECB) announced that it will raise key interest rates next month to curb inflation, causing many citizens to fear higher interest rates and higher loan installments. The Banking Agency of the Federation of Bosnia and Herzegovina states that a change in the interest rate and payment plan is only possible for previously agreed loan arrangements that include the possibility of an interest rate change.

"In our market, we can expect changes through interbank reference interest rates used to determine the final rate for variable-rate contracts, most commonly Euribor. A change in the interest rate and payment plan is only possible for previously agreed loan arrangements that include the possibility of an interest rate change," the Agency points out.

Before entering into a contractual relationship, they explain, the bank is obliged to inform the client about the details of possible changes.

Furthermore, the lender is obliged to provide all necessary information about changes in the interest rate level during the term of the arrangement.

Taking into account the available information and expectations regarding interest rates, the Agency further states, as well as the fact that the possibility of an interest rate change was foreseen when the contract was concluded, changes in the level of reference interest rates should not jeopardize the payment capacity of most clients.

According to them, the key risks for citizens and the economy remain related to inflation.

What will happen to loans with fixed interest rates?

Regarding citizens' concerns about a possible increase in loan installments, the Banking Agency of the Federation of Bosnia and Herzegovina notes that loans previously agreed with a 'fixed' interest rate will not be exposed to the risk of changes in reference interest rates.

They further explain that in usual lending practice, 'fixed' rates already include components of expected changes (interest rate risk) and are usually higher than rates that form the basis for calculating variable interest rates.

Possibility of mitigating the effects of interest rate changes later in the year

"Maintaining the stability and liquidity of our banking system suggests the possibility of mitigating the effects of interest rate changes later in the year. According to current knowledge, the increase in the level of reference interest rates in the EU and the Eurozone should be maintained at an acceptable level that will not jeopardize the growth of the Union's economies or lead to a recession," the Agency notes, adding that reliable ranges or forecasts of the effects of ECB measures are not available.

In addition, they emphasize that for assessment purposes, the experience from previous periods and monitoring the dynamics of rate increases prescribed by the ECB can be taken as relevant, with effects that will be partially transferred to interbank reference rates and our market.

The ECB's announcements for the current year indicate a change of 25 to 75 basis points, i.e., rate adjustments of 0.25 to 0.75 percent.

The final interest rates on interbank markets also depend on other factors, particularly the supply and demand for money, as well as other macroeconomic trends.

When asked about existing loans, those with a currency clause in euros and national currency, the Agency states that in a 'currency board' system, interest rate levels are not tied to the loan currency, if it is in euros and marks.

Commenting on the ECB's decision to raise key interest rates, the Banking Agency of the Federation of Bosnia and Herzegovina notes that the change in the European Central Bank's (ECB) credit and monetary approach will have effects on interest rate levels in the EU interbank market.

"It is still considered that the ECB has limited room to implement measures and increase interest rates to a level that will not lead the leading EU economies into recession, or lead to the fragmentation of interest rate levels across EU member states and the Eurozone. In addition to the ECB currently focusing on inflation risks, the halt of expansionary monetary policy and the promotion of low reference rates were announced before the pandemic," the mentioned agency emphasizes.

On the other hand, in addition to July, the possibility of interest rate increases in the fall has also been announced.