The Eurozone’s European Central Bank and the central banks of other countries, each in its home country, have been battling exceptionally rapid inflation for almost two years. This has been done primarily by raising interest rates, which in turn has put both individuals and businesses in a difficult situation with loans for which they have to pay significantly higher interest than before. Furthermore, rising interest rates have severely reduced demand and cooled the economy to the point of recession. To date, these measures have begun to bring the desired consequences and inflation is gradually decreasing both in Europe and in other markets.
Based on this, I dare to predict that a great year of falling interest rates has begun, which is hopeful news for borrowers, an encouraging signal for entrepreneurs and, at the same time, a reminder for depositors that there is still the possibility of opening deposits and obtaining a considerable income from them. Here are five recommendations to keep in mind in 2024.
1. Let’s be optimistic
The leaders of the European Central Bank and the US Federal Reserve are trying with their public statements to cool the markets’ expectations that interest rates will begin to fall rapidly this year, 2024. Unfortunately, market participants do not really believe to these voices. The expectation of a decline in interest rates has already reached businesses and individuals through the decline in the Euribor, for example the 6-month Euribor has already fallen by almost 0.3 percentage points from its peak early October.
This expectation is also demonstrated by future money market transactions and rates for setting interest over a longer period. Market operators rather believe that the 6-month Euribor will already reach 3.1% at 6 months and 2.5% at 12 months.
The last few years have been difficult, and boredom and desperation are certainly starting to set in among business owners and consumers alike. However, the signals coming from the financial markets give us confidence and strength to resist and transform the decline into a recovery with a more optimistic attitude.
2. Take Advantage of the High Interest Rate Environment (While They Last)
So far, interest rates on time deposits have also started to fall. Deposits with longer maturities are already priced lower than shorter ones in anticipation of a further decline in interest rates. The decline in deposit rates is also far from over and very soon the 4-5% deposit rates offered in 2023 will seem like a thing of the past. Today, however, it is still possible to find excellent opportunities to deposit money in a term deposit at banks, and it is worth doing. On bond markets, prices take into account the already existing expectation of a decline in interest rates, so the best time for buying long-term bonds has now passed.
3. For private individuals: save the money released by the rate reduction
All borrowers feel the impact of a high interest rate environment. Higher loan payments last year caused many customers to review their daily spending. If the Euribor were to fall now, this will lead to an easing of loan payments. If possible, I recommend not immediately spending the money freed from loan installments, but creating (or restoring) a basic financial buffer at your expense. For this purpose, the free money can be paid, for example, into a savings account, a fixed-term deposit or the third pillar of pension provision. This helps to instill confidence in the future in a situation where unemployment numbers could still rise.
4. Keep your employer and your job
It is impressive that, in the flurry of changes of recent years, the labor market has remained in fairly good shape and unemployment has been moderate both in Estonia and in the broader Eurozone and the United States. At the same time, it is clear that if the economy continues to be cooled by high interest rates, such a good situation in the labor market cannot last long. Even though interest rates have already started, the tension on the labor market will certainly continue to grow, because there is strong inertia in the economy. It is also clear that if some companies are closed and jobs disappear, their recreation cannot happen quickly, even after the crisis ends.
Therefore now every employee could make an effort to keep their job and not put pressure on the employer with an unrealistic desire for a salary increase. Some employees may have to accept a slight drop in wages this year to keep their jobs, because sales have fallen so sharply that employers simply don’t have the money to pay current salaries.
If employees and employers can be mutually flexible in such situations, when the crisis passes there will be an opportunity to continue cooperation under better conditions. . Estonian society has also demonstrated this in previous crises – for example the 2008-2009 crisis and the Covid crisis – that the flexibility of both companies and the labor market ensured a rapid recovery after the crisis. This is a major trump card compared to the ossified labor markets and unions of old Europe. Let’s use this trump card wisely in cooperation between entrepreneurs and employees.
5. For the entrepreneur: remove the dust from the business plan left in the drawer
In recent years, entrepreneurs’ optimism and courage to invest have significantly decreased. It was very reasonable and justified. Anticipating the lowering of interest rates later this year and with it the relaunch of the economy, it is the best time to start planning new projects that in the meantime have been waiting their time in the drawer. Starting a new business or investment also takes time, and starting at the right time can give you an edge over your competitors.
Bankers are generally more cautious than average, but we at Coop Bank believe that stupid investment decisions are made during boom times. Now that we are emerging from another crisis, we are ready to contribute to Estonia’s economic growth. As a highly capitalized bank, we can be the fertilizer for new economic growth, but entrepreneurs must sow the seeds and cultivate the land. As a national bank, we are actively looking for new financing opportunities, we want to finance business projects that will help the Estonian economy get back on its feet.
However, the economic depression is not over yet
To survive major changes healthily and effectively requires a joint effort from everyone. First of all, it is important that the European Central Bank, which with its decisions has the greatest impact on the economy, does not overdo it by cooling the economy and opens the oxygen valves at the right time and with moderation. On the other hand, the contribution of entrepreneurs is also important, for whom the closest neighborhoods seem rather grey. At the same time, however, interest rates have started to fall, and this decline will probably be quite rapid, creating good conditions for businesses to resume their investment plans, which in the meantime had been put on the back burner, and start implementing They. Third, it is important that all private individuals understand the weight of the big changes and their contribution to them, and that they can now contribute to the preservation of jobs, so that the new beginning is easier for all of us.
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2024-01-25 11:00:00
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