The Monetary Policy Council reduced interest rates to practically zero
Information after the meeting of the Monetary Policy Council
on May 28, 2020
The Council decided to lower the NBP reference rate by 0.40 percentage points, i.e. to the level of 0.10%. At the same time, the Council determined the following level of other NBP interest rates:
• reference rate 0.10%;
• lombard rate 0.50%;
• deposit rate 0.00%;
• rediscount rate 0.11%;
• promissory note discount rate 0.12%.
Interest rates and WIBOR
WIBOR (Warsaw Interbank Offered Rate), to put it simply, is the rate at which commercial banks borrow money from each other. Figuratively speaking, it is the price of money on the interbank market.
WIBOR is designated every business day for the so-called WIBOR fixing. Its amount is set by the largest Polish banks. WIBOR adopts several variants, from one day to one year, but the interest rate is always given on a 12-month basis. For the vast majority of people, 3M WIBOR is important, i.e. the cost of the loan in 3-month terms. Why this one? Because this parameter in the overwhelming number of product contracts with a variable interest rate (e.g. mortgage, cash, leasing, etc.) is the basis for its calculation.
How is WIBOR calculated?
In practice, it will always be the value between the lombard rate and the deposit rate, usually at reference rate levels. What is the reason? On the logic – it would be unprofitable to borrow competition cheaper than the deposit rate. It makes more sense to deposit this money with the NBP. It would also not be the wisest idea to take a loan more expensive than the lombard rate, since it is available for borrowing at the NBP for just such a percentage. The best reference point will be taking the value at which most open market transactions are concluded, i.e. the reference rate.
How does this effectively translate into interest?
Assuming that 3M WIBOR would decrease by 0.39 pp. (from the 0.69 percent level recorded a few days ago), the interest rate on the mortgage with a 1.8-point margin would drop to 2.19 percent. Installment for a 20-year loan for 450 thousand PLN would decrease from PLN 2,382 to PLN 2,317. At first glance, slightly, but when we look closely at how the ratio of capital to interest will change in each installment, we will notice that the savings on the total interest will amount to 121 769 – 106 125 = PLN 15 644 !.
Important information for people with cash loans
We would like to remind you that the maximum annual interest rate on loans and advances is set by the reference rate. At the current level of 0.1%, the maximum annual interest rate imposed by KNF regulations will be 7.2% instead of the current 8%.
Historical interest rates – households
The above chart shows that the total interest rate on both housing and consumer loans has been gradually decreasing since 2012 to currently take values (for housing loans) below real inflation.