Interest rate cuts likely to take place in 2024, CBC governor says

Finance Minister Makis Keravnos and Cyprus Central Bank (CBC) governor Constantinos Herodotou held a meeting on Thursday, discussing a potential decrease in interest rates by the European Central Bank (ECB) during 2024.

Both the minister and the CBC governor agreed that interest rates are likely to fall before the end of the year, unless any unforeseen event disrupts the current trend.

Herodotou also mentioned the positive trajectory of the Cypriot economy, Keravnos echoing this statement.

“We found that the Cypriot economy is on a good course, which we should try to preserve,” the minister said.

When asked about where he sees the ECB’s interest rates moving if there is a slowdown in inflation, Herodotou called it “very good news” that inflation both in the Eurozone and especially in Cyprus made great progress.

He recalled that in 2022, inflation in Cyprus was at 8.1 per cent and reached its highest point at 10.6 per cent in July of the same year, before falling 1.9 per cent in December of 2023, while a minimal increase is expected in January due to base effect.

“So we recognise the good progress, which was mostly due to monetary policy, but at the same time it was helped by the support measures which were done in a “targeted way”, without creating inflationary tendencies, but on the contrary, it helped and was in addition to monetary policy,” he stated.

Moreover, he said that at the same time, there is increased uncertainty due to geopolitical developments, especially the attacks on the Suez Canal and the situation in the Middle East.

“We are taking into account the progress made and I would say there will definitely be some interest rate cuts within 2024, unless we see some unexpected developments” he said.

Herodotou underlined, however, that “it is important to say that the decrease of interest rates should not start too soon because then inflation may return, and that will be a negative development, because then we will have to act again with measures to limit it”.

“So, based on the data, we have to see when it is justified to see a decrease in interest rates within 2024,” Herodotou said.

When asked how the Cypriot economy and prices are affected by the Houthi attacks in the Red Sea since the majority of Cypriot imports are from Europe, the Minister of Finance said that fortunately, most consumer products come from European countries, noting however that there are issues such as cruise ship tourism which is affected, with some losses being observed.

He also stated that the whole situation affects the Cypriot economy, since it is integrated with the wider European economy, which is governed by a specific operating framework hence is affected indirectly or directly.

As he said, from the latest statistics, it appears that there is a decrease in the prices of basic products, even in fuel.

“So we are closely monitoring these issues and the intention is that there will be measures when needed but the measures will be highly targeted so that there is no question of a resurgence in increases in inflation” he said.

Despite several interest rate hikes, Herodotou observed that fears of a surge in non-performing loans (NPLs) have not materialised.

He attributed this to measures ensuring banks consider borrowers’ repayment capacity, while also mentioning that increased savings have helped lenders’ capacity to remain resilient while they deal with non-performing loans.

Regarding the new framework pertaining to NPLs, Keravnos noted a positive response from borrowers, underlining the government’s implementation of a stable foreclosure framework with a safety net.

Herodotou highlighted ongoing efforts by banks and credit acquisition companies, resulting in £2.4 billion worth of loan restructuring in 2023.

In response to questions about smaller banks’ NPL ratios, Herodotou mentioned a CBC plan in collaboration with the Ministry of Finance, currently in its second phase, aiming to help smaller banks reduce bad loan ratios.