The populists of the political parties have found a new, worthy cause in the last few weeks – to protect people from rising interest rates. They appear to have forgotten that the period of very low interest rates was just a brief interlude in the history of market economies and could never have been permanent. They have also forgotten the times, in the not-too-distant past, when households and businesses had to live with interest rates of eight and nine per cent, that were set by the state and central bank. Nobody was protesting in those days and demanding rates were lowered because they were unaffordable.
Interest rates have always been an important tool in the smooth functioning of a market and for the efficient allocation of resources. That eurozone countries are facing a high inflation rate, which has made the increase of interest rates by the ECB necessary, is because for close to 15 years interest rates had been at extremely low levels, even below zero for a spell. The situation was made worse by the ECB’s quantitative easing during the pandemic, when governments were paying people that were not working. Now, the corrections have to be made and it will be a painful process, because measures for bringing inflation under control are never pleasant.
All parties, with the notable exception of Disy, embrace the unorthodox economic thinking of Akel which centres on state intervention in the market. There are suggestions for the state subsidising interest payments by vulnerable groups and small businesses, for the banks absorbing part of the increased interest on loans, for banks and credit-buying companies limiting their profitability and for the central bank placing certain restrictions on the banks. These were all vague, general ideas that would defeat the objective of the increase of the interest rates by the ECB, which was to bring inflation under control. If loan repayments were subsidized and interest rates kept constant, prices would continue on their upward path, at a faster rate.
It is extremely worrying that new finance minister Makis Keravnos seems to be on the same wavelength as the populist parties speaking as if he was running a command economy. At the House finance committee last Monday, Keravnos sounded more like a deputy keen to pander to the electorate rather than as the minister charged with the responsibility of ensuring a well-functioning economy. He said he had sent strict letters to the banks and loan-buying companies, urging them to reduce interest on loans and charges, and to increase interest on deposits, warning that if they did not, he would consider imposing regulations.
Worse still, he had also spoken and written to the Central Bank governor, to whom he said he gave “very clear advice” with regard to “the reduction of interest rates on loans and of bank charges, increase of interest on deposits, prompt implementation of viable restructurings and mainly the compiling of a list of strategic defaulters.” Had Keravnos decided to overrule the ECB, to whom the governor of the Central Bank is accountable? The increase in interest rates is a decision of the ECB, which is in charge of monetary policy in the eurozone and raised interest rates to 3 per cent last month, because its primary objective is to bring down inflation, which is forecast to be 5.3 per cent this year. In Cyprus, the forecast is below the eurozone average at 4 per cent, but it is still high enough to warrant the tighter monetary policy.
Bank-bashing is a popular activity of the politicians but the finance minister should know better than to take part in it. Having been the CEO of a bank for close to 10 years and having been on the executive council of Central Bank until recently, Keravnos knows the importance of healthy banks in the economy. He also knows that the banks will inevitably increase the interest rates on deposits, because part of the reason for higher interest rates is to encourage people to save and reduce spending. Of course, he also knows that higher deposit rates would push up loan rates, because the banks would want to maintain their margins. There is usually a difference of 3 per cent between deposit and loan rates.
Increasing rates on deposits and reducing rates on loans is not an option as anyone with the most basic understanding of banking knows. This fantasy measure, if it were ever implemented, would also defeat the purpose of the higher interest rates imposed by the ECB as it would fuel inflation instead of bringing it under control. It is possible that Keravnos’ bizarre stance at the House finance committee was dictated by the presidential palace, which has shown a worrying inclination to pander to public sentiment, but this still does no justify advocating the undermining of ECB monetary policy and interfering in the operation of the market economy. We are in difficult economic times and the government should be telling people this, instead of pretending there is a no-pain way out this, which there is not.