Cyprus central bank eases cash for banks to boost slowdown

The Central Bank of Cyprus has eased the minimum liquidity reserve requirement in foreign currencies, effectively injecting millions more available cash into the banking system, just over a month after it said that the local economy appeared to be experiencing “a small slowdown in activity.”
The move is expected to release just over EUR 550 mln of liquidity into the market by Cyprus’ three largest banks.
The central bank directive cuts the reserve requirement in foreign currencies to 70% of total foreign deposits from 75%. In effect, this means that commercial banks can now lend the equivalent of up to 30% of their total foreign currency deposits compared to 25% before.
“At 70% we are able to release additional liquidity to the benefit of banks and still be able to maintain a prudent and conservative regulation on liquidity reserve,” a Central Bank official was quoted as saying.
On July 8 the Central Bank urged authorities to contain spending and save some of the surplus it generated in 2007 to safeguard the long-term viability of public finances.
Despite putting Cypriot growth on a par with Finance Ministry projections of 3.6% growth this year, the Central Bank said that a slowdown in state revenues for the first five months of 2008, coupled with what it said appeared to be higher spending, suggested a “significant deterioration” of fiscal indicators for 2008.
“Based on the first data of the year, the Cypriot economy appears to be experiencing a small slowdown in activity, while inflation and public finances have displayed a worrying trend because of domestic and external factors,” it said in its biannual report.
Cyprus public finances recorded a 3.3% surplus in 2007 on the back of a buoyant real estate sector, which has since shown signs of tapering off.
Based on May data, the Central Bank had said it expected domestic inflation to reach 4.2% in 2008, and moderate to 2.4% in 2009.
The survey also offered a glimpse into households’ borrowing patterns. Housing loans represented 43% of lending exposure and consumer loans 19.6% as of March 31 this year.
The overwhelming majority of mortgages, some 97%, were with floating interest rates.
“Households are vulnerable to oscillations which could possibly occur by a sudden or significant increase in interest rates,” the Central Bank report said. Recent turmoil on international financial markets has also led to a liquidity squeeze in international money markets and an increase in short-term rates on the Interbank market, the mechanism banks use to borrow or lend money to one another.
Strong competition among banks to lure deposits – offering high returns – can also manifest as additional costs for banks which could at some point spur them to transfer the additional cost onto borrowers.
Domestic banks this year raised their base rates for new loans twice, citing conditions on the Interbank market.