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The European Central Bank’s latest interest rate increase, its first since 2023, is expected to boost bank profitability across the eurozone, including Cyprus, by widening the gap between what banks earn from loans and what they pay out to savers.
While higher rates usually suggest better returns for depositors, the reality in practice is more complicated. Banks tend to pass on rate increases more quickly to borrowers than to savers, meaning households and businesses paying loans feel the impact immediately, while deposit rates move much more slowly.
In Greece, the new hike is projected to increase annual interest income for banks by around €147 million, largely due to this imbalance. A similar pattern is expected in Cyprus, where Greek-owned lenders operate alongside local banks and follow the same eurozone monetary policy set in Frankfurt.
According to banking sector data, the spread between lending and deposit rates has already been widening. In recent months, it rose to 4.45% from 4.08%, reflecting the earlier movement in the eurozone’s benchmark rates.
The key driver is the three-month Euribor rate, which typically signals ECB policy shifts. It has climbed steadily, pushing average lending rates higher while deposit rates have lagged behind.
For households, the increase in savings returns has been modest at best. While term deposit rates have edged up, they remain far below the eurozone average. In Greece, for example, a benchmark often compared with Cyprus due to the strong presence of Greek banks on the island, household term deposits average just 1.13%, compared with a eurozone average of 1.87%.
By contrast, countries such as the Netherlands and Finland offer rates above 2.3%, while Italy and France also provide higher returns than most southern European markets. Greece sits near the bottom of the eurozone ranking, just above Slovenia.
The pattern highlights a growing imbalance: while banks benefit from higher interest income, savers see only limited improvements in returns, especially on fixed deposits.
For Cypriot households, the impact is expected to be similar. Loans, particularly mortgages and business credit linked to floating rates, are likely to become more expensive, while savings accounts and term deposits are unlikely to fully reflect the ECB’s 0.25% increase.
Banking officials note that deposit rates will rise, but not in line with the central bank’s moves. Instead, adjustments are expected to remain partial and gradual.
This widening gap between lending and deposit rates has become a key source of profitability for banks across the eurozone but also a growing frustration for savers, who see limited reward for keeping money in the banking system despite higher interest rate conditions.
As the ECB continues to navigate inflation pressures linked to geopolitical tensions and energy markets, analysts say the divergence between borrower costs and saver returns is likely to remain a defining feature of the current cycle, including in Cyprus, where households are already feeling the strain of higher loan repayments and rising living costs.
