Cyprus’s Central Bank (CBC) surprised markets by reducing its key refinancing rate by 50 basis points to match the ECB’s 4.0 percent level, just ten days before the island enters the euro zone.
Speaking after an unscheduled meeting of the Monetary Policy Committee (MPC), Central Bank Governor Athanasios Orphanides said the
He also said the Central Bank decided that the base rate of bank loans for existing commercial credit be defined as the refi rate.
Orphanides explained that the CBC went ahead with the decision despite the fact that on December 10, during the MPC’s scheduled meeting, it had decided that the official interest rates remain unchanged at 4,50%.
“We felt that it was a good moment to match our rates as we are near the end of the yearâ€, he said.
According to the CBC governor, the MPC took into consideration that there were doubts at how the conversion would work on existing loans.
“Reading some press reports in recent days, we realized that not everyone was as sure as we were as to the correct interpretation of the lawâ€, Orphanides said, adding that “our accession to the Eurozone is of historic significance for our island, therefore it should take place in the most effortless possible manner. When there are questions or doubts, it is best that these are addressedâ€.
He pointed out that the continuity of existing contracts was of high significance and this is safeguarded by European regulations.
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Euribor or Refi?
Analysts view the Central Bank action as closely associated with efforts to force them to use the refinancing rate as the benchmark for loans rather than shift to the 3 month or 6 month Euribor (Euro interbank offered rate), which is much higher.
Banks complain that with the refi rate now adjusted to 4 percent, while the 3 and 6 month Euribor are stubbornly up at 4.80 percent, their margins are under pressure.
An informed source told the Financial Mirror that since banks will most likely follow the instructions of the Central Bank, the only alternative is for them to increase the spread at which they charge borrowers to compensate the shortfall.
Since most loans are based on the
For new loans, they will probably attempt to price the loans based on 3 or 6 month Euribor, with the rate calculated at every fixing, rather than the average of the fluctuations during the period.
Either way, the cheaper rate for existing loans may not last long, as the ECB will meet on January 8 to discuss changing the base interest rate. Reports suggest it may go up to 4.5 per cent to tackle the inflationary price rises in energy and food.
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