President's call for lower interest rates sparks banking sector discussion

President Nikos Christodoulides has recently voiced his concerns about the increasing cost of borrowing due to interest rate hikes that are affecting both the economy and households.

In an interview with Phileleftheros Daily, the President urged banks to take tangible steps in helping to absorb some of these rising costs and ease the burden on low-income families. He expressed his worries about the potential rise in non-performing loans if the cost of borrowing continues to climb unchecked.

Christodoulides, while emphasizing the importance of a robust banking system for the country's economic growth, called on financial institutions to assist people facing financial difficulties in meeting their financial obligations. He stressed the need for banks to play a more supportive role during these challenging times.

The President also pointed out the significance of interest rates in addressing the increasing household expenses. He clarified that while executive power cannot directly intervene, the government can make recommendations to the banks. Finance Minister Makis Keravnos echoed these sentiments, urging banks to reduce their borrowing rates.

In light of these concerns, Keravnos is scheduled to meet with the heads of banks in the coming week. Additionally, the government is contemplating the possibility of introducing a windfall gains tax on bank profits resulting from heightened interest rates.

The situation escalated after the European Central Bank (ECB) raised the three key interest rates by 25 basis points on July 27, marking the ninth rate hike since July 27, 2022. This move was aimed at swiftly bringing inflation back to its 2% medium-term target. However, it has left households and businesses in Cyprus struggling, given the fragile economic environment.

Political pressure is mounting to increase deposit rates, as Cyprus banks currently offer the lowest returns among EU member states. For households with a one-year term, the average deposit rate in January was a mere 0.24%, which increased to 1.21% by June. Similarly, the deposit rate for businesses increased from 1.97% in January to 3.16% in June.

Mortgage interest rates also witnessed fluctuations, with rates rising to 4.67% in March and then decreasing to 4.19% by June. This has significant implications for the nearly €2 billion mortgage portfolio for houses valued up to €350,000.

In response to these challenges, most domestic banks have introduced various schemes to boost deposit rates and retain mortgage customers, especially those with consistent payment records. In June, the average EU interest rate on deposits with a one-year maturity increased by 24 basis points to 2.73%, primarily driven by the effects of interest rate changes.

The President's request that banks help reduce citizens' financial burdens is currently the subject of intense debate within the banking industry. Cyprus is currently dealing with the effects of interest rate increases, and the banking sector must decide how it will contribute to the stability of the economy of the nation.