Cyprus Banks Prepared to Adjust Interest Rates Following ECB’s December Meeting

The Association of Cyprus Banks announced on Tuesday that it is ready to immediately adjust interest rates tied to the European Central Bank’s (ECB) base rate following the ECB’s upcoming meeting on December 12. In a statement, the association explained that this adjustment would have a direct impact on the monthly loan instalments of their clients.

The association emphasized the importance of the ECB’s final meeting of the year, highlighting that most central bankers have indicated the likelihood of a new rate cut. “Should a further reduction be decided, it will mark the fourth rate easing since June, with the cumulative decrease exceeding 1 per cent, providing relief to borrowers and businesses,” the association noted. Thousands of borrowers with loans linked to the ECB’s base rate are expected to see their instalments reduced immediately if the anticipated cut is implemented. The association also remarked, “The ECB’s interest rate reductions, following the containment of inflation, signal lower borrowing costs and indirectly boost economic growth.”

Recent reports indicate that the ECB is widely expected to cut its deposit rate by 25 basis points (bps), or 0.25 per cent, during the December 12 meeting. A Reuters poll of 75 economists revealed that all but two predicted this reduction, marking the fourth such adjustment by the ECB this year. The remaining two economists forecast a more substantial cut of 0.5 per cent.

The rate cut comes amid mounting concerns about the economic impact of proposed tariffs by US President-elect Donald Trump, which economists warn could escalate into a broader trade war. This development is seen as posing a greater challenge to ECB policy than ongoing political instability within Europe, including the recent collapse of the French government.

The ECB’s Governing Council appears united in its expectation of a 25 bps cut, with hawkish members, such as Robert Holzmann, ruling out the possibility of a larger reduction. Futures markets currently project over 150 bps in cumulative ECB rate cuts by the end of 2025, far outpacing the anticipated rate cuts by the US Federal Reserve. This projection signals a prolonged period of accommodative monetary policy and continued pressure on the euro, which is expected to remain weak in the near future.

Economists also predict at least two additional quarter-point cuts during the first quarter of 2025, with further reductions likely by mid-year. By the end of 2025, most expect rates to fall to 2.00 per cent or lower, compared to approximately 70 per cent who shared this view in November.

Projections for economic growth in the eurozone have been revised downward, with the median expectation now at 1.0 per cent in 2025 and 1.2 per cent in 2026. Inflation, which currently stands at 2.3 per cent, is expected to retreat to the ECB’s target of 2 per cent by mid-2025 and stabilize thereafter. The ECB will provide updated economic projections during the December meeting, shedding more light on its policy trajectory as it continues to address trade tensions, inflation, and slowing growth across the eurozone.

By fLEXI tEAM