Piquing interest

With the dramatic stock-market slides recently, investors divesting themselves of shares are looking for less risky investments for their newly freed capital. At the same time, banks are losing liquidity as investors withdraw their money from investment funds.

"There is panic on the bourse. Everyone is fleeing and selling shares, which frees up assets," Anna Boniecka, a stock analyst from Bankier.pl, told WBJ. These assets could be allocated in a number of safer financial instruments, such as bonds and treasury bills, but banks are hoping investors will put their funds in the bank for a rainy day - and competition for the customer is growing fierce.

"There is tight competition on the [retail] banking market," said Boniecka. "An interest-rate war could break out," she added, noting that the interest rates of both current and time deposit accounts are rising in order to attract investors decamping from the bourse.

Banks that have already raised interest rates on their time deposit accounts include Citibank Handlowy, Eurobank, Getin Bank and Polbank. PKO Bank Polski has announced that it also plans to raise interest rates in the near future.

Experts said that the banks were employing the strategy in order to attract more capital and improve liquidity, after the market slowdown caused the withdrawal of a significant amount of capital from investment funds.

"Until now, banks were seeing a really huge inflow of money via commissions on investment funds," Boniecka pointed out.

Also contributing to higher interest rates was the recent - though not unexpected - tightening of monetary policy by the central bank. Due to the booming economy, last year's four interest-rate rises had little effect on the rates offered on bank accounts, many of which were no higher than the rate of inflation at the end of 2007. Now however, customers paying higher interest rates for loans expect higher returns on their bank accounts, and are demanding that bank rates beat the growing rate of inflation.