ECB Rate Hike Hits Montenegro's Borrowing Costs with a Soft Touch

Montenegro's central bank believes the European Central Bank's (ECB) recent interest rate hike will slow down, rather than reverse, the country's two-year decline in borrowing costs.

The ECB raised its three key rates by 25 basis points on September 10, with the deposit facility rate moving to 2.50 percent, the main refinancing rate to 2.65 percent, and the marginal lending facility to 2.90 percent. However, Montenegro's banking system is shielded from these changes due to its fixed-rate loans and deposits.

The Central Bank of Montenegro (CBCG) says only 6.12 percent of total loans in the country carry variable rates, meaning most borrowers are insulated from short-term movements in market references such as EURIBOR. Furthermore, banks fund themselves mainly through local deposits rather than wholesale European borrowing, reducing their funding costs' sensitivity to ECB policy changes.