The European Central Bank (ECB) has raised interest rates twice this year, leading to a significant increase in the six-month Euribor rate from approximately 2.1% to 2.88%. This development is expected to have a profound impact on Serbian borrowers, particularly those with euro-indexed loans, which amount to nearly 10 billion euros, primarily in housing loans. The adjustments in the ECB’s monetary policy are anticipated to affect Serbian citizens more substantially than the domestic decisions made by the National Bank of Serbia, according to Nenad Gujaničić, a chief broker at Momentum Securities.
The ECB’s decision to increase interest rates by a total of about half a percentage point this year has resulted in a 70 basis point rise in the Euribor following the latest rate hike. The ECB’s deposit rate, which had remained steady at 2% for a year, was first increased to 2.25% and then to 2.5% at the most recent meeting. This change in the Euribor, which is used to calculate the interest on many variable-rate loans, means that borrowers will see their monthly payments increase. For a typical housing loan of 100,000 euros, the monthly installment could rise by approximately 50 euros, as explained by financial consultant Vladimir Vasić.
The impact of these rate hikes is compounded by ongoing geopolitical tensions, particularly in the Middle East, which continue to exert inflationary pressures. ECB President Christine Lagarde has noted that inflation is expected to remain significantly above target for an extended period, with the outlook remaining highly uncertain. The ECB has also adjusted its GDP growth expectations for this year from 0.8% to 0.9%, citing economic resilience despite these challenges.
In Serbia, the prevalence of euro-indexed loans means that changes in the Euribor directly affect a large number of borrowers. These loans are predominantly taken with variable interest rates, which are composed of a bank’s margin plus the Euribor rate. As banks typically adjust the Euribor rate in loan agreements twice a year, borrowers with such loans have either already experienced or will soon experience an increase in their monthly payments.
The National Bank of Serbia (NBS) has maintained its reference interest rate at 5.75% for the past two years. This stability contrasts with the ECB’s recent actions, highlighting the greater influence of the ECB’s decisions on Serbian borrowers. Vasić points out that for Serbia to regain monetary sovereignty in lending, it would require the Serbian dinar to become a long-term source of financing, a process that demands time and the establishment of stability to ensure sufficient dinar funds for placements. Currently, dinar-denominated housing loans account for only about 1% to 2% of the total, underscoring the dominance of euro-indexed loans.
The broader economic implications for Serbia are significant. Germany and Italy, Serbia’s dominant foreign trade partners, are experiencing economic challenges, with Germany recording modest growth of just 0.2% last year. In a high-cost money environment, these issues could become more pronounced, potentially affecting Serbia’s ability to export goods and services to these markets.
As the ECB signals a trend of increasing money costs, the financial burden on Serbian borrowers is expected to rise, affecting their disposable income and potentially impacting consumer spending. The situation underscores the interconnectedness of global monetary policies and their direct effects on local economies, particularly those with significant foreign-currency-linked debt.
