Cyprus Anticipates Interest Rate Cuts Amid Positive Economic Trajectory and Inflation Progress

Finance Minister Makis Keravnos and Cyprus Central Bank (CBC) governor Constantinos Herodotou convened on Thursday to deliberate on the potential decrease in interest rates by the European Central Bank (ECB) throughout 2024. Both officials concurred that a decline in interest rates is probable before the year concludes, contingent upon the absence of unforeseen disruptions. Reflecting on the positive trajectory of the Cypriot economy, Minister Keravnos expressed the need to preserve its favorable course.

Governor Herodotou acknowledged the commendable progress in combating inflation both in the Eurozone and Cyprus. In 2022, Cypriot inflation stood at 8.1%, reaching a peak of 10.6% in July before receding to 1.9% in December 2023. He characterized this as a result of effective monetary policy and targeted support measures. Despite geopolitical uncertainties, such as events in the Suez Canal and the Middle East, Herodotou anticipates interest rate cuts within 2024, contingent on the evolving circumstances.

Emphasizing the importance of timing, Herodotou cautioned against premature rate cuts that might reignite inflation. The interconnectedness of the Cypriot economy with the broader European economy necessitates a prudent approach to economic adjustments. Responding to the impact of Houthi attacks on the Red Sea, Minister Keravnos noted potential effects on cruise ship tourism but affirmed that most consumer products come from European countries, mitigating direct repercussions.

Regarding interest rate hikes, Herodotou noted the absence of anticipated surges in non-performing loans (NPLs). He attributed this resilience to measures ensuring banks assess borrowers' repayment capacity and emphasized the role of increased savings in bolstering lenders' resilience. The Finance Minister highlighted a positive response from borrowers to the new NPL framework, emphasizing the government's commitment to a stable foreclosure framework with a safety net. Additionally, ongoing collaborative efforts between banks, credit acquisition companies, and the government aim to reduce NPLs, with £2.4 billion worth of loan restructuring achieved in 2023. In addressing concerns about NPL ratios in smaller banks, Herodotou outlined a CBC plan, in partnership with the Ministry of Finance, designed to assist smaller banks in mitigating bad loan ratios.

By fLEXI tEAM