Record low interest rates in Poland

The Monetary Policy Council (MPC) reduced interest rates again which led to interest rates reaching the lowest ever level of 0.10%. Analysts, economists and journalists have been assessing the impact of the decision for some time in the context of the appropriateness of the reduction. As always, there are different views, but most of the commentators tend to have negative opinions. Personally, I do not intend to judge this move; I leave it to everyone to judge. It is worth noting, however, a few economic and social issues which are affected by the current situation, which Marcin Rudziński, member of the board of Higasa Properties, writes about on our blog.

Loan interest rates: The maximum interest rate on loans and borrowings is currently 7.2% for new agreements. Individuals or companies that have already had loans (with a variable interest rate) will soon notice a decrease in the instalment or shortening of the loan period. On the other hand, those currently trying to take out a loan will probably feel that banks will compensate for the reduction in interest rates by increasing their commissions. Therefore, those who will benefit from the reduction are persons who already have liabilities.

Deposit interest rates: After the last reduction, the average fee paid by banks for lending them our savings has fallen below one. In the current state, keeping funds in deposit accounts/bank accounts is a loss. Does this mean that we should keep our funds under the mattress? A bank account is nevertheless safer because we do not run the risk of theft.

Government /corporate bond interest rate: As a rule, the risk of investing funds in bonds is higher than in the deposit account, which makes the interest rate (in this case, increased by a “risk premium”) higher and ranges from 0.5% for government bonds to up to 6.1% for corporate bonds. Nevertheless, in most cases, we still lose money invested this way in real terms as the inflation rate in May was 2.9%.

Condition and loan capacity of banks: At current interest rates, banks compensate for the reduction in the maximum interest rate (7.2%) by increasing the margin as high as possible. However, considerable detail should be taken into account. In order for banks to be able to lend money, they themselves must have a capital of 10% of the loans. That is, they borrow money from clients (by offering deposits, etc.). If, however, customers withdraw their deposits more and more often in the current situation due to the very low interest rates as above, banks lose the capacity to grant new loans and may even have to aggressively raise funds from clients in order to maintain the ratio at a level consistent with the regulations. Therefore, banks are currently tightening their credit policies or even stop granting loans.

Alternative investments: Clients “defecting” from banks look for alternative investments. Experience has shown that they usually turn to what they know. This is mainly due to experience that is not always sufficient or due to blindly imitating what most people do. Thus, it is usually an attempt to make money on renting a flat, less often loans, bills of exchange or condo hotels etc. Unfortunately, in such situations there are various companies and institutions offering high profits, such as the maximum interest rate of 7.2% + 5% of the investment premium/commission for the money transferred. Nowadays, it is very important to be very careful to whom and for what we give our money and, above all, to check carefully what the percentages offered result from and how realistically our funds are secured.

In theory, the reduction of interest rates is aimed at three “tasks” in relation to the state budget: the first task is to reduce the debt service cost (in order to, in fact, incur even more debt). And I suspect that this is probably the reason why the MPC made this decision. The second task is to stimulate the economy by encouraging entrepreneurs to take loans from banks for investment. The mechanism is as follows: cheap money increases investment outlays, which should contribute to increasing companies’ income, which in turn increases revenues from taxes paid to the budget. However, since getting credit is difficult or even impossible, as I mentioned above, this condition will not be met. The third task is to stimulate (or even force, at a rate of 0.1%) savers to consume or invest their savings in order to stimulate the economy. But since we have already learnt that we usually invest in what we know, we should assume high demand for residential properties. This in turn leads to an even bigger price bubble. And yet, already a year or even two years ago, it seemed that prices were ridiculously high.


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