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Banks under pressure to absorb interest hikes

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Cyprus banks are feeling the heat from political parties and the government to absorb part of the increased cost of borrowing created by interest rate hikes burdening the economy and households.

According to reports, Finance Minister Makis Keravnos has renewed calls to the island’s banking institutions to shoulder part of the cost of borrowing, while the parliament has slotted a session to discuss the matter.

MPs have invited the Finance Minister and the Central Bank of Cyprus governor to a preliminary meeting this week before the House resumes after the holiday break.

On July 27, the European Central Bank (ECB) raised the three key interest rates by 25 basis points.

Accordingly, the interest rate on the main refinancing operations and the marginal lending facility and the deposit facility increased to 4.25%, 4.50% and 3.75%, respectively.

This was the ninth time the ECB increased interest rates since July 27, 2022, in a bid to ensure that hiking inflation returns to its 2% medium-term target promptly.

The hike in lending rates has shocked households and businesses amid a fragile economic environment, which the banking system seems to be taking into consideration.

Since last April, almost all domestic banks have announced various attractive schemes to increase the deposit rate and retention of mortgages, mainly for consistent borrowers.

However, the further absorption by the banks of a greater part of the cost from the increase in interest rates is being urgently tabled by the government and political parties.

Local media reports have senior banking officials acknowledging there could be room for closing the gap between lending and deposit rates.

Reportedly, banks also have plans to launch incentive schemes for young couples to take out mortgages based on a more attractive long-term fixed interest rate.

The average deposit rate for households with a one-year term in January was 0.24%, in February 0.59%, in March 0.47%, in April 41%, in May 0.79% and in June 1.21%.

Rates for May and June indicate political pressure to push up deposit rates, as Cyprus banks paid out the lowest rate among EU member states.

The deposit rate for businesses other than financial institutions, for one year, in January rose to 1.97%, in February to 2.29%, in March to 2.56%, in April to 2.79%, in May to 2.95% and in June to 3.16%.

For mortgages, the interest rate in January increased to 3.11%, in February to 3.42%, in March to 4.67%, in April to 4.45%, in May it decreased to 4.21% and in June to 4.19%.

The mortgage portfolio for houses up to €350,000 is worth close to €2 bln.