The surge in interest rates and their persistence at high levels are pressing concerns for households and businesses, significantly impacting their day-to-day lives, alongside the challenge of inflation.
This issue also holds a prominent position on the political agenda. Discussions around economic matters are dominated by the question of when interest rates will ease, as the European Central Bank’s initial 0.25% reduction signals the commencement of a rate-cutting cycle, but leaves the timing and magnitude of future cuts unclear.
Both Christine Lagarde and eurozone central bank governors who commented publicly following the ECB’s decision emphasised that any new reductions would hinge on inflation trends.
When probed about the ideal interest rate, the Governor of the Central Bank of Cyprus, Christodoulos Patsalides, merely stated that it had been predetermined.
However, while the outlook for new rate-cut decisions from Frankfurt remains uncertain, data indicates that interest rates in Cyprus had already begun to ease before the ECB’s moves.
Specifically, as ECB statistics reveal, lending interest rates for Cypriot households have decreased by 0.50% from the start of 2024 until April, a reduction notably higher than the EU average of 0.08% over the same period.
The rapid ascent
Looking back two years to when the ECB embarked on raising rates to combat inflation, we observe a sharp climb in Euro reference rates such as Euribor and the ECB’s Main Refinancing Operations (MRO) rate.
Focusing on the six-month Euribor, it soared from 0.62% in July 2022 to a peak of 4.14% in October 2023. The ascent was even more pronounced for the MRO rate, leaping from 0% in July 2022 to 4.5% in October 2023.
The onset of the downward trend
October 2023 marks a pivotal moment, as it signalled the ECB’s pause in its series of rate hikes before enacting cuts in early June 2024, bringing the MRO rate down to 4.25%. The six-month Euribor has since entered a gradual downward trajectory, currently resting at 3.74%.
Analysts in Cyprus and abroad anticipate that this declining path will persist, with forecasts suggesting a further drop to 3.25% for Euribor and 3.40% for the MRO rate by year-end.
While borrowers with variable-rate loans navigate turbulent economic waters, those with loans linked to banks’ base rates find themselves in calmer conditions.
This is because the increases in these rates have been slower, milder, and generally constrained to much lower levels, as they are tied to the cost of deposits in the domestic market.
A cursory glance at the upward movement of the base rates of the country’s two largest banks underscores a substantial difference compared to the volatile variable-rate loans.
Specifically, the base rate of Bank of Cyprus is currently 1.61%, while Hellenic Bank’s base rate stands at 2.09%, reflecting far more modest increases from the 0.06% level two years prior.
