The European Central Bank (ECB) is poised to announce its third interest rate cut since June on Thursday, potentially lowering rates by 0.25 percentage points.
This move is expected to provide some relief to borrowers, although the impact may be limited.
Several ECB board members, including the central bank governors of Germany and France, have signalled their support for the rate cut. Francois Villeroy de Galhau, governor of the Bank of France, stated: “A drop is very likely at the ECB meeting on Thursday, following June and September, and it won’t be the last.”
The anticipated rate reduction is expected to have varied effects on different types of loans and borrowers. Those with variable-rate loans will see modest decreases in their repayments, while fixed-rate loans will remain unaffected. Market sources suggest that a cumulative one percentage point reduction in ECB rates would be necessary to significantly impact loan instalments.
For example, a €200,000 mortgage with a 20-year repayment term and a current interest rate of 6% could see monthly payments decrease by approximately €35 following the expected 0.25% rate cut.
While the rate cut may offer some respite to borrowers, it is not favourable for Cypriot depositors, who already face the lowest interest rates in the Eurozone.
Banks’ interest income is also expected to come under pressure, though not to an extent that would significantly affect 2024 profits or 2025 balance sheets.
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