Cyprus Mail

BoC ready to follow CBC on lower interest rates

BoC CEO John Hourican

By Elias Hazou

FOLLOWING talks with the island’s systemic banks, the Central Bank of Cyprus (CBC) may soon – perhaps even next week – announce a drop in lending rates, the Mail understands.

The island’s largest lender, Bank of Cyprus (BoC) is likely to subsequently announce a reduction in its lending rates, both to new and existing borrowers.

On Thursday, CBC governor Chrystalla Georghadji met successively with the bosses of the three biggest lenders, discussing how the banks can lower their rates, giving borrowers some breathing space.

Speaking to reporters later, John Hourican, the BoC CEO, said he and Georghadji talked about how to stimulate borrowing, adding that the governor “has some good ideas.”

“The bank will wholeheartedly support that policy change… and whatever timetable she chooses,” Hourican said.

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.

In this case, the CBC 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.

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.

The CBC and commercial lenders are now number-crunching to see how the mooted change will impact the latter.

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.

But to BoC at least, the arising losses from the mismatch are negligible, and the lender is understood to be on board with the central bank’s idea.

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.

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

Around 50 per cent of all bank credit is non-performing. Banks cite their high level of NPLs on their balance sheets as a chief reason for not taking risk by issuing new loans, leading to a lack of liquidity.

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