Our View: Higher deposit rates, lower loan rates are a fantasy

Finance Minister Makis Keravnos wrote to associations representing the banks and loan-purchasing companies asking them to absorb part of the cost from the rise in interest rates so that loan instalments were stabilised and the burden on households was eased. In other words, he wants these companies not to raise interest rates, in line with the decisions of the European Central Bank, which determines monetary policy in the euro area. At the same time, he urged the banks to raise interest rates on deposits.

Keravnos said: “I believe this would be to the benefit of the banks and the loan-purchasing companies because they would express their corporate and social responsibility.” It is difficult to know whether the minister was being serious, or his comments were a public relations exercise – an exercise in economic populism, to show the government’s sensitivity to people faced with higher loan repayments for their homes. In his letter he suggested the banks show their corporate and social responsibility for loans up to €350,000.

It may have escaped the notice of the finance minister that banks and loan-purchasing companies are for-profit entities, accountable to their shareholders. This is the harsh reality of market economies. Should a bank board tell its shareholders that the dividend they were promised will not be paid, because the government wanted it to absorb the cost of higher interest rates while also increasing the interest on deposits? Higher interest rates which were not a whim of the banks but imposed by the ECB as a way of fighting rampant inflation.

The Cyprus Banks Association highlighted the superficiality of the minister’s proposal on Thursday, by asking what his objective was and what he wanted to focus on. His proposal could not be uniform and refer to a specific type of borrower. Most importantly, the products and costing for each bank are different. For example, Hellenic Bank calculates the interest rate it charges differently than the Bank of Cyprus does. It has a base rate which determines interest on deposits and loans and these have remained relatively stable. At the Bank of Cyprus interest on loans is floating, determined by the ECB rates. We suspect neither bank would be prepared to increase deposit rates and lower loan rates as the minister is suggesting because this would cut profit margins.

The association’s remark about the type of borrower that should benefit also highlighted the fact that the minister’s proposal was not thought through. Why should a homebuyer be entitled to reduced interest rates and not a small business or a start-up, for example? There really is no formula for protecting people and businesses from the rise in interest rates. The government should make this clear instead of the minister making half-baked suggestions that he – as former bank CEO – knows cannot be applied.