Lending rates to increase gradually

By Yiannis Seitanidis

Hellenic Bank CEO Oliver Gatzke said he expected there would be some time between the ECB’s rate hike in July and an increase of lending rates in Cyprus.

This was due to the fact that 70 per cent of Cyprus’ loans were not linked to the ECB’s base rate, but to the Central Bank of Cyprus rate, which was calculated on the basis of the cost of deposits in the banking system in its entirety.

The excess liquidity kept the cost of deposits low and Hellenic Bank did not intend to raise deposit rates, Gatzke explained.

However, the decision to impose a deposit levy on household deposits over €100,000, which would have been introduced from July, would not be implemented.

At a secondary stage, Hellenic Bank will reconsider this measure when negative interest rates on corporate deposits will return to zero.

The increase in borrowing rates will arise mainly as a result of the increase in risk in the real economy.

Inflation, which reduces purchasing power and demand, and rising interest rates, which lead to a constraint on growth, combined with shortages of goods made up a cocktail that was not good, Gatzke noted.

At the same time, there was also the risk of a recession in the US and the European Union in 2023, with the Hellenic Bank CEO noting that the key question is how the economy will perform next year and whether we will have a recession in Cyprus as well.

Asked if he fears a new wave of bad loans due to the increase in borrowing costs, Gatzke noted that the risk of default was very low due to the strict lending criteria, which take into account the impact on repayment capacity of a rise in interest rates.

The ECB previously decided to raise its interest rate by 0.25 per cent in July, to be followed by a further increase of at least 0.25 per cent in September. Gatzke estimated that the interest rate could reach the 1 per cent mark by the end of 2023.

Moreover, Gatzke described the war in Ukraine as a “game changer” and stressed the need for complete independence from the Russian market as he did not see an end to the war and sanctions anytime soon. Instead, sanctions may be in place for the next 3 to 5 years.

In this environment, the positive counterbalance was the interest in the relocation of businesses to Limassol from Israel, Lebanon and other countries, investment flows that can help the Cypriot economy overcome the shock of job losses from Russia.

Meanwhile, the Hellenic Bank CEO is keeping a low profile on the labour dispute with the bank employees’ union, noting that the redundancy process has been suspended and that he looked forward to an agreement on a new collective agreement by early August. The new agreement would take into account the need to reduce costs.

Gatzke repeated that the automatic salary increases, the contributions to the health fund, provident fund and welfare Fund, the number of employees and the amount of compensation in a new voluntary redundancy plan were all interlinked.