The Co-operative Central Bank (CCB) announced on Friday it will cut interest rates on well-performing housing loans by 1 point from 5.2% to 4.2% as of March 1, affecting about 34,000 households retrospectively.
This follows the proposal made by Central Bank Governor Chrystalla Georghadji to all commercial banks on Thursday to reduce lending rates and to help spur the economy, as interest rates in Cyprus are the most expensive in the Eurozone at 2% higher than the rest.
The Co-operative added, however, that the reduction will only affect mortgages that are being serviced. Non-performing loans (NPLs) it added, will receive a 0.5% interest rate cut only after these are restructured and begin to be serviced, while the remaining 0.5% rate cut will kick in retrospectively after the loan emerges from the NPL status, usually 90 days after regular payments.
The CCB also announced last month that it would cut interest rates on agricultural loans by 2% on average and a reduction in lending rates on student loans back in 2014.
Meanwhile, Hellenic Bank also said that it follow the Central Bank’s proposals and reduce lending rates by 1%, but only after it receives full guidelines from Governor Georghadji.
Hellenic Bank CEO Bert Pijls said in a statement on Friday that the bank “welcomes the proposal that the Central Bank’s Governor extended to us, which we find valuable and constructive”, adding “we commit our support towards its implementation.”
He said that Hellenic Bank gradually reduced its deposit rates and a month ago, starting from 3% for new loans to businesses.
Bank of Cyprus, too, said it will lower rates, after a meeting its CEO John Hourican had with Georghadji on Thursday.
The island’s largest lender is likely to announce a reduction in its lending rates, both to new and existing borrowers.
Whereas the Central Bank does not have the power to directly set interest rates, it has a series of policy tools at its disposal to steer banks in a certain direction, the Cyprus Mail reported on Friday.
In this case, the Central Bank plans to introduce a disincentive to banks hoarding their cash, by requiring them to hold higher capital reserves (provisioning) should they lend money at more than 2 basis points above the Euribor rate, the newspaper added.
Euribor rates are based on the average interest rates at which a large panel of European banks borrow funds from one another. They are considered to be the most important reference rates in the European money market.
Currently, banks incur a penalty for higher capital reserves if their lending rates are at 3 basis points above Euribor.
For the lenders, there will be a transitory mismatch between deposit and lending rates. For a certain length of time (up to 18 months) a bank cutting its lending rates across the board will still have to pay the same deposit rate for say, time deposits and certificates of deposit maturing in six months.
The policy tool being mulled by the CBC is seen as an effective one, as it will compel all lenders to cut both their loan and deposit rates at the same time, thus avoiding giving a competitive advantage to any one bank, the Mail added.
It is hoped that the lower cost of borrowing will encourage people to better service debts in the red, in this way helping to somewhat reduce the non-performing loans on banks’ balance sheets.
