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The era of high inflation and interest is coming to an end – what does this mean for investments?

Deividas Urbanovičius
The era of high inflation and interest is coming to an end – what does this mean for investments?
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This article was published on 15min.lt

The high inflation and interest rates that have prevailed in Lithuania over the last couple of years have led to a rise in the popularity of investment instruments such as bonds and deposits. Now, the situation is changing, both in Lithuania and Europe. What does this mean for people's investments, and what should people pay attention to when investing, explains the expert. 

"In 2022, Lithuania recorded its highest annual inflation since 1995, reaching 19.7%. This situation has caused the Lithuanian population, which is used to relatively low inflation, to look for ways to protect their money from depreciation and rising prices. The increase in interest rates has also led to a rise in the popularity of certain types of investments, which were previously somewhat neglected," says Deividas Urbanovičius, Head of Investors Relations at InRento, a platform for crowdfunding investments in buy-to-let projects.

In 2023, a Bank of Lithuania study showed that the number of people investing jumped by as much as 75% over the year. In the past year, the total number of investment transactions made by the Lithuanian population was almost 2 million – twice as many as in 2022.

"Investors have started to choose more instruments such as funds and bonds. Investments in bonds in Lithuania doubled to €769 million. Invested assets in funds grew similarly, reaching €706 million last year. As the European Central Bank (ECB) raised the interest rate to 4% per annum, the interest rates offered on deposits also rose, boosting the popularity of this type of investment. The amount held in fixed-term deposits in Lithuania also doubled last year to €22.3 billion. Meanwhile, investments in real estate with a mortgage loan became less attractive for a while due to the increased cost of loans," says D. Urbanovičius. 

How will the new environment affect different investment opportunities?

May data show that inflation in Lithuania fell to 0.9%. In response to the economic developments, the ECB started cutting base rates in June for the first time since 2019. 

"What does this change mean for people's investments? As interest rates fall, the interest rates offered on bonds and deposits will also fall, and these investment instruments are likely to lose their current popularity. On the other hand, falling interest rates boost economic growth, which may lead to a rise in stock markets and, in turn, to more activity in investing in companies' shares," says D. Urbanovičius. 

According to the expert, falling interest rates may also affect the real estate sector, as the cost of borrowing will fall. 

How should investors behave?

D. Urbanovičius points out that looking for investments that offer a fixed return for a year or several years ahead is a good idea.

"Recently, some companies in Lithuania have issued bonds with relatively high, often double-digit, interest rates. So you can look at bonds issued in the past, but you need to look at the safeguards. You can also look at alternative investments, such as the fixed annual interest rates of up to 10.5% for a maximum period of 36 months on buy-to-let projects financed by InRento," says D. Urbanovičius.

The expert highlights that the changing macroeconomic situation reminds us of the importance of regularly reviewing our portfolios when investing. 

"With the constant changes, reviewing your portfolio and investment allocation carefully is crucial. It is also important to remember that investments are always associated with risk, and historical investment performance does not necessarily mean that we will see the same results in the future," notes the Head of Investors Relations at InRento.