Kuczyński: Lower interest rates mean lower loan installments

Depending on the scale of the interest rate cut by the Monetary Policy Council, mortgage loan installments may fall by several dozen to over a hundred zlotys in the case of a loan of PLN 300,000 - assessed Xelion analyst Piotr Kuczyński. If rates fall, we will have to wait a bit for smaller installments - he added.

The Monetary Policy Council (MPC) will decide on interest rates at a two-day meeting starting on Tuesday. Currently, the NBP main interest rate, the reference rate, is 5.75%. The MPC has been maintaining it at this level since October 2023.

The possibility of a rate cut in the near future was indicated by NBP President Adam Glapiński during a conference after the Council meeting in early April. He assessed that it could happen in May, June and July.

Piotr Kuczyński, a financial market analyst at Xelion Investment House, said in an interview with PAP that the Monetary Policy Council will decide to cut the reference rate by 25 or 50 basis points at its May meeting.

"I would prefer it to be 50 points," he stressed.

The interest rate is the cost of borrowing money. Banks granting loans want to make money on it, so the price of the loan consists of two elements: the bank's margin and the WIBOR rate - explained Kuczyński.

Of all the NBP interest rates, borrowers should actually be interested in only one – the reference rate, because it influences the WIBOR rate and the final interest rate on banking products.

"WIBOR, or Warsaw Interbank Offered Rate, is the rate at which banks borrow money from each other for 3 or 6 months (...) When granting a loan, the bank lends us cash as if it was lending to another bank," explains Kuczyński.

The WIBOR rate also depends on market expectations. At the last April press conference, NBP President Adam Glapiński stated that he is "a dove among doves".

"The word dove, as opposed to hawk, in our slang means that someone is in favor of lowering interest rates," explained Kuczyński, adding that this statement was enough for the WIBOR rate to start falling.

"WIBOR began to adjust to market expectations, i.e. a reduction in interest rates, because there was a clear difference in the statements of the NBP president," the expert emphasized.

The Xelion analyst also explains the change in attitude of the NBP president.

"Some MPC members usually voted the way he did, but some started to break away and talk about the need to cut rates. This indicated that he could lose the vote, so he simply changed his mind," he added.

According to Kuczyński, if the expected cut is only 25 basis points, WIBOR will not fall any further. However, if rates fall by 50 points, WIBOR may fall slightly.

The analyst pointed out that the impact of NBP interest rates on mortgage loans for individuals depends primarily on the agreement signed with the bank. Some provide for a fixed interest rate, others a variable one.

"We have been saying for many months that due to the expected reduction in interest rates, taking out a loan with a fixed interest rate is disadvantageous for consumers," Kuczyński said.

Such agreements most often assume a 5-year horizon (fixed rate) and potential reductions have no impact on the amount of the loan installment.

In the case of a variable interest rate, the monthly installment should be reduced.

"But this will not happen immediately after the MPC decision, but after 3 or 6 months, depending on whether a given loan is linked to the 3-month or 6-month WIBOR," Kuczyński noted.

He added that with a 50-point reduction in the reference rate, the installment may be significantly lower, but this depends on the amount of the loan and the amount remaining to be repaid.

According to his preliminary estimates, in the case of a loan of PLN 300,000, at the current WIBOR level, a 25 basis point rate cut would result in a reduction of the monthly loan installment by approximately PLN 60; if it were 50 points – PLN 120.

"However, you have to remember that different banks have different repayment models, so in this simulation I am omitting such details as whether someone repays only the capital or only the interest first," explained the Xelion Investment House analyst.

NBP interest rates affect not only the amount of loan installments, but also deposits . According to Kuczyński, Poles have 1.4 trillion złoty in cash in banks.

"It's really a lot, almost 40 percent of the Polish budget," he noted.

In his opinion, the expected reduction in NBP rates will not affect deposit interest rates.

"Politicians strongly criticize banks for very low interest rates on deposits. I believe that bank boards will not dare to reduce them even more," the PAP interviewee pointed out. He added that if they did decide to do so, consumers would not feel it anyway.

Kuczyński also pointed out that lower loan installments mean that borrowers will have a little more cash at their disposal, so they will either "increase their deposits or spend this money."

The analyst also referred to the interest rate on retail Treasury bonds in the context of a potential rate cut. Last year, Poles invested over PLN 82 billion in them.

Kuczyński recalled that the Minister of Finance, apparently anticipating a rate cut, has already reduced their interest rate. This applies to 3-year (or longer) bonds, the interest rate of which has fallen by 20 basis points. This means that investors' profit from holding treasury bonds will be lower than expected when buying them - the expert pointed out.

Kuczyński is convinced that the potential interest rate cut in May will not be a one-off.

"I assume that it will be a whole cycle. This year we should see reductions of up to 125 basis points, which means that at the end of the year the NBP reference rate should be between 4.5 and 4.75 percent," assessed an analyst at Xelion Investment House. (PAP)

Infographics for subscribers of the Infographic Service available at: https://igrafika.pap.pl/

mrb/ mick/ bst/ lm/ pr/