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At the beginning of October, the Monetary Policy Council raised interest rates, with the base rate rising from 0.1% to 0.5%. It means that the average instalment of a PLN housing loan will now amount to around 35 PLN more. The MPC’s decision will increase interest rates on both deposits and loans, and it will shorten the time to reach pre-pandemic interest rate levels to 1-2 years.
Raising interest rates from 0.1% to 0.5% will increase loan instalments, but the time for banks to adjust to the new changes, both in terms of increasing interest rates on deposits and loans, can be as long as three months. It is worth noting, however, that the basic interest rate, raised to 0.5%, is still lower than the 1.5% rate that was in place before the pandemic. According to Bartosz Turek, chief analyst at HRE Investments, the MPC’s decision may cause the total cost of all PLN-denominated housing loans to go up by around PLN 1.5bn per year.
Interest rates and mortgage instalments
The changes will make the average instalment of a PLN-denominated housing loan by about PLN 35 more. The increase is expected in the case of loans of 190,000 PLN with an interest rate of 2.3% and 18 years left to repay. However, in the case of people who have only recently taken out a loan, these costs may be slightly higher. This is the case for people who have taken out a 25-year and PLN 300,000 loan with an interest rate of 2.85%. Currently, the instalment of such a loan is 1,399 PLN, but the increase in interest rates will make the monthly instalment 1,462 PLN, i.e. it will increase by 63 PLN.
As Bartosz Turek adds, the MPC’s decision may be positively received by people with loans in francs, as the introduced change strengthened the Polish zloty. During the day, when the Monetary Policy Council decided to raise interest rates, the zloty strengthened from the level of 4.30 per franc to 4.25, and this translated into lower franc loan instalments by over 1%, i.e. from around PLN 15 to PLN 25.
Will deposits become more attractive?
According to Turek, the MPC’s decision will also affect interest rates on deposits, which will no longer reach just 0.1-02%. Although PLN 10,000 deposits currently generate interest of over a dozen zlotys, in a few months they may increase to some PLN 30-40 and that will be the amount after tax. The average interest rate will thus rise to around 0.4-0.5%, provided there is no further increase in interest rates. The chance of additional changes is quite high, but only the next Council meeting will show to what extent the current forecasts are accurate.
The latest MPC decision has affected the market’s assessment of a return to pre-pandemic interest rate levels. Earlier calculations pointed to a 2-3 year perspective, but it is now estimated that this could happen even within 1-2 years. According to Bartosz Turek, the expected rate rises should bring some normality back to the markets, but it is worth remembering that even before the pandemic there had been claims that loans were cheap and bank deposits would not protect savings against inflation.