Cen­tral Bank cuts ceil­ing on rates, banks to fol­low

Financial Mirror (Cyprus) - - FRONT PAGE -

The Cen­tral Bank of Cyprus said on Mon­day that its gov­ern­ing coun­cil de­cided to lower the ceil­ing on its base in­ter­est rate by one per­cent­age point, urg­ing the is­land’s com­mer­cial banks to fol­low suit by cut­ting lend­ing rates and help spur money sup­ply and eco­nomic ac­tiv­ity.

The banks were quick to re­spond say­ing they would go ahead with rate re­duc­tions as of March 1.

The Cen­tral Bank said in an an­nounce­ment that “fol­low­ing dis­cus­sions with banks’ rep­re­sen­ta­tives, it is con­fi­dent that credit in­sti­tu­tions will pro­ceed im­me­di­ately with re­spec­tive re­duc­tions in lend­ing rates.”

It added that “the Cen­tral Bank will mon­i­tor closely the course of lend­ing rates and, if nec­es­sary, will re­view, in the fu­ture, fur­ther mea­sures.”

On Fri­day, the Co-op­er­a­tive Cen­tral Bank (CCB) jumped the gun when it an­nounced it will cut in­ter­est rates on wellper­form­ing hous­ing loans by 1 point from 5.2% to 4.2% as of March 1, af­fect­ing about 34,000 house­holds ret­ro­spec­tively.

This fol­lows the pro­posal made by Cen­tral Bank Gover­nor Chrys­talla Ge­orghadji to all com­mer­cial banks on Thurs­day to re­duce lend­ing rates and to help spur the econ­omy, as in­ter­est rates in Cyprus are the most ex­pen­sive in the Eu­ro­zone at 2% higher than the rest.

The Co-op­er­a­tive added, how­ever, that the re­duc­tion will only af­fect mort­gages that are be­ing ser­viced. Non­per­form­ing loans (NPLs) it added, will re­ceive a 0.5% in­ter­est rate cut only af­ter th­ese are restruc­tured and begin to be ser­viced, while the re­main­ing 0.5% rate cut will kick in ret­ro­spec­tively af­ter the loan emerges from the NPL sta­tus, usu­ally 90 days af­ter regular pay­ments.

The CCB also an­nounced last month that

it would cut in­ter­est rates on agri­cul­tural loans by 2% on av­er­age and a re­duc­tion in lend­ing rates on stu­dent loans back in 2014.

Mean­while, Hel­lenic Bank also said on Fri­day that it planned to fol­low the Cen­tral Bank’s guid­ance and re­duce lend­ing rates by 1%, but only af­ter it re­ceives full guide­lines from Gover­nor Ge­orghadji.

Hel­lenic Bank CEO Bert Pi­jls said in a state­ment on Fri­day that the bank “wel­comes the pro­posal that the Cen­tral Bank’s Gover­nor ex­tended to us, which we find valu­able and con­struc­tive”, adding “we com­mit our sup­port to­wards its im­ple­men­ta­tion.” He said that Hel­lenic Bank grad­u­ally re­duced its de­posit rates a month ago, start­ing from 3% for new loans to busi­nesses.

Bank of Cyprus, too, said it will lower rates, af­ter a meet­ing its CEO John Houri­can had with Ge­orghadji on Thurs­day.

The is­land’s largest lender sub­se­quently is­sued an an­nounce­ment on Mon­day say­ing it will lower the base rate by 1% from March 1 for all new and ex­ist­ing loans, with a seam­less re­duc­tion in monthly in­stal­ments and loan bal­ances that will af­fect some 180,000 ac­counts held by 94,000 clients, for a ben­e­fit to the con­sumer of about ?57.4 mln.

As re­gards NPLs that are restruc­tured, th­ese will ben­e­fit from a 2% gain once they en­ter the per­form­ing level, i.e. 90 days af­ter the last regular re­pay­ment.

Whereas the Cen­tral Bank does not have the power to di­rectly set in­ter­est rates, it has a se­ries of pol­icy tools at its dis­posal to steer banks in a cer­tain di­rec­tion, the Cyprus Mail had re­ported last Fri­day.

In this case, the Cen­tral Bank




a dis­in­cen­tive to banks hoard­ing their cash, by re­quir­ing them to hold higher cap­i­tal re­serves (pro­vi­sion­ing) should they lend money at more than 2 ba­sis points above the Euri­bor rate, the news­pa­per added.

Euri­bor rates are based on the av­er­age in­ter­est rates at which a large panel of Euro­pean banks bor­row funds from one an­other. They are con­sid­ered to be the most im­por­tant ref­er­ence rates in the Euro­pean money mar­ket.

Cur­rently, banks in­cur a penalty for higher cap­i­tal re­serves if their lend­ing rates are at 3 ba­sis points above Euri­bor.

For the lenders, there will be a tran­si­tory mis­match be­tween de­posit and lend­ing rates.

For a cer­tain length of time (up to 18 months) a bank cut­ting its lend­ing rates across the board will still have to pay the same de­posit rate for, say, time de­posits and cer­tifi­cates of de­posit ma­tur­ing in six months.

The pol­icy tool be­ing mulled by the CBC is seen as an ef­fec­tive one, as it will com­pel all lenders to cut both their loan and de­posit rates at the same time, thus avoid­ing giv­ing a com­pet­i­tive ad­van­tage to any one bank, the Mail added.

It is hoped that the lower cost of bor­row­ing will en­cour­age peo­ple to bet­ter ser­vice debts in the red, in this way help­ing to some­what re­duce the non-per­form­ing loans on banks’ bal­ance sheets.

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