Monetary policy strategy
The turnaround in the monetary policy strategy of the American Centrum Bank will lead to higher interest rates on installment loans and other loans.
The CEB interest rate is currently 1.0 percent, which is lower than ever. Banks can borrow an unlimited amount of money at this rate and thus significantly reduce their refinancing costs. An increase in interest rates will not only make installment loans more expensive, but also variable-rate loans such as credit lines and overdrafts.
Key rate will be raised
Economists estimate that the key rate will be raised by 50 basis points in April. Two more rate hikes are expected by the end of the year, so the key rate could well be 1.5 percentage points higher in 8 months than it is now. Interest rate developments are mainly influenced by inflation: the CEB wants to keep the inflation rate below 2 percent pa in the long term, and must tighten monetary policy zigzags if inflation picks up.
Not only the key interest rate could rise. Since the onset of the financial crisis, the CEB has done a great deal with various programs to push long-term interest rates as well. For example, the central bank bought up government bonds in the market, thus stimulating the prices of the securities, which is synonymous with falling interest rates. In addition, it also accepts government bonds with a low rated credit rating as collateral for loans to commercial banks. If these measures are also discontinued, the interest rates could rise significantly, even for medium and long maturities.
At present, banks are demanding an average of 7.14 percent interest a year on installment loans with a 36-month term. With a 60-month maturity, borrowers pay an average of 7.55 percent pa. This is evident from the indices of independent MHF financial advice. Accordingly, banks demand an average of 11.22 percent for out-of-pocket loans and 15.4 percent pa for tolerated overdrafts.
The interest on disbursements could rise particularly sharply as interest rates rise.
Under the consumer credit directive of last year, the legislator has stipulated that the interest rates must be linked to a reference interest rate. These are the CEB key interest rate or a money market interest rate. Since the coupling to the reference interest rate was calculated at historically low interest rates, rising interest rates will make account overdrafts even more expensive than before.
Experts recommend that all existing liabilities be reviewed in the coming days and that the possibility of debt rescheduling be considered. Especially covered checking accounts and balances on revolving cards should be compensated. Even with older installment loans, however, it often pays off.