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The Central Bank of Cyprus said on Monday that its governing council decided to lower the ceiling on its base interest rate by one percentage point, urging the island’s commercial banks to follow suit by cutting lending rates and help spur money supply and economic activity.
The Central Bank said in an announcement that “following discussions with banks’ representatives, it is confident that credit institutions will proceed immediately with respective reductions in lending rates.”
It added that “the Central Bank will monitor closely the course of lending rates and, if necessary, will review, in the future, further measures.”
On Friday, the Co-operative Central Bank (CCB) jumped the gun when it announced 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 on Friday that it planned to follow the Central Bank’s guidance and reduce lending rates by 1%, but only after it receives full guidelines from Governor Georghadji. This has now happened and the bank will probably announce a rate cut on Monday or Tuesday.
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 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 subsequently issued an announcement on Monday saying it will lower the base rate by 1% from March 1 for all new and existing loans, with a seamless reduction in monthly instalments and loan balances that will affect some 180,000 accounts held by 94,000 clients, for a benefit to the consumer of about €57.4 mln.
As regards NPLs that are restructured, these will benefit from a 2% gain once they enter the performing level, i.e. 90 days after the last regular repayment.
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 had 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.
