Cyprus was among the euro area countries where banks increased deposit rates less aggressively following the European Central Bank’s (ECB) interest rate hikes, according to a new ECB working paper examining how banks priced deposits between 2007 and 2024.

The research found that banks in Cyprus and other southern euro area countries generally passed on a smaller share of ECB rate increases to savers than banks in northern Europe, highlighting significant differences in how monetary policy reached depositors across the currency bloc.

The paper examined both the supply and demand factors shaping deposit pricing and concluded that changes in depositor behaviour played a larger role than differences between banks themselves.

According to the study, the pass-through of ECB policy rates to overnight deposit rates has been consistently low, has declined over time and has varied depending on the monetary policy environment.

The authors argued that the sluggish increase in deposit rates following the ECB’s interest rate increases from 2022 onwards was largely driven by changes in who kept money in overnight accounts rather than by a lack of competition between banks.

The paper found that savers who were most sensitive to interest rates increasingly moved their money into higher-yielding alternatives, such as term deposits and money market funds, leaving behind a larger proportion of customers who were less likely to switch accounts.

As a result, banks gained greater pricing power over the remaining pool of overnight deposits and were under less pressure to raise the interest rates paid to those customers.

The study covered the period from the global financial crisis through the years of negative ECB interest rates and into the sharp monetary tightening that began in 2022.

It found that the long-run pass-through of policy rates to household overnight deposits was relatively limited, estimating a deposit beta of 0.247.

The researchers also found that the pass-through weakened significantly over time, falling from about 0.3 during the 2007 to 2008 rate-hiking cycle to around 0.1 during the 2022 to 2024 period.

Another finding was that deposit rates responded more strongly when the ECB cut interest rates than when it raised them.

The study also concluded that the years of negative interest rates between 2014 and 2022 changed depositor behaviour by reducing the attractiveness of alternative savings products.

During that period, most customers continued to hold overnight deposits because there were few higher-yielding alternatives available.

Once the ECB began raising interest rates in 2022, however, wealthier households and larger businesses, which typically held larger balances and were more responsive to changes in returns, shifted their money into products offering higher yields.

The paper found that firms were generally more sensitive to interest rates than households, while households in higher-income northern European countries were also more likely to move their savings in search of better returns than households in lower-income southern countries, including Cyprus.

On the banking side, the researchers estimated that banks retained an average markdown equivalent to 92 per cent of gross revenue, indicating substantial pricing power over depositors.

They found that this pricing power increased after the period of negative interest rates and reached its highest level during the 2022 to 2024 tightening cycle.

The researchers also carried out simulations to test what would have happened if all depositors had remained equally responsive to interest rates.

They estimated that household overnight deposit rates would have been around 31 basis points higher on average over the sample period and as much as 45 basis points higher in 2024.

Under that scenario, the responsiveness of deposit rates during the 2022 to 2024 interest-rate cycle would have been roughly twice as high as actually observed.

By contrast, removing differences between banks themselves produced results that closely matched actual deposit rates, leading the authors to conclude that changes in depositor behaviour, rather than bank characteristics or weak competition, were the primary reason why deposit rates rose so slowly following the ECB’s rate increases.

The paper also highlighted broader policy implications, suggesting that the effectiveness of monetary policy depends not only on current interest rates but also on how households and businesses respond after prolonged periods of low or negative rates.

It added that improving financial literacy and increasing awareness of alternative savings products could encourage greater competition for deposits and ultimately lead to higher deposit rates, while also warning that banks may become increasingly reliant on customers who rarely move their savings, creating new considerations for financial stability during periods of market stress.