Cyprus: A familiar economic space for Greece

In an interview conducted by Kathimerini reporter Panayiotis Rougalas, Greece's Central Bank Governor, Mr. Yiannis Stournaras, sheds light on various aspects of the country's monetary policy and economic landscape.

Stournaras emphasizes the effectiveness of recent interest rate hikes by the European Central Bank (ECB) in curbing inflation without significant repercussions on the real economy and financial stability. The unprecedented speed and intensity of these hikes, initiated since July 2022, led to visible impacts on corporate and household lending rates, resulting in reduced loan demand and slowed credit expansion. Despite the slowing of economic activity, the Governor notes that Greece and Cyprus have experienced higher GDP growth rates compared to many other Eurozone countries.

Addressing the possibility of lowering interest rates, Stournaras indicates the need for confidence in inflation converging steadily towards the medium-term target of 2%. He points to positive signs of inflation slowing down and the potential for a rate reduction in the second quarter of the year.

On the subject of interest rates returning to pre-pandemic levels, Stournaras expresses skepticism, citing the importance of the natural rate of interest and its evolution. He suggests that considering various factors like productivity growth, population aging, and geopolitical disturbances, the natural rate in the "new normal" is unlikely to return to pre-pandemic lows.

Concerning the impact on banks when interest rates decrease, Stournaras acknowledges potential challenges, especially for banks heavily reliant on floating-rate loans. However, he reassures that the banking sector is better equipped to handle such transitions, having improved portfolio quality and reduced credit risk.

In the realm of international expansion, Stournaras positively assesses a Greek systemic bank's acquisition of another systemic bank in Cyprus, emphasizing the economic growth in both countries.

Regarding asset quality, Stournaras notes the dramatic improvement in Greek banks' non-performing loans (NPLs) and expects a mitigated impact on bank portfolios in the face of economic growth and the ECB's gradual reduction in key interest rates.

Addressing new risks related to the climate crisis and cybersecurity, Stournaras highlights the need for banks to manage climate risks and support the transition to sustainable development. He stresses that regulatory efforts are intended to prepare banks for the effects of climate change and the challenges of digital transformation.

In a final note, Stournaras expresses confidence in his relationship with the Governor of the Central Bank of Cyprus, Mr. Konstantinos Herodotos, describing it as "excellent and mutually beneficial cooperation over the years."

[This interview was translated from its Greek original and edited for brevity]