ECB to implement first interest rate cut

The European Central Bank (ECB) is poised to execute its much-anticipated rate cut, scheduled to take effect on Thursday, June 6, 2024. The move, announced to diminish interest rates by 25 basis points, offers a glimmer of hope to borrowers grappling with escalating loan repayments. With the current deposit rate of 4% on track to dip to 3.75%, the ECB aims to inch closer to its long-term target of 2% inflation, a critical step toward stabilizing prices and curbing inflationary pressures. This strategic maneuver, strategically timed just three days prior to the European elections on June 9, underscores the ECB's commitment to fostering economic stability and financial prudence.

While the ECB's primary mandate is to safeguard price stability, it acknowledges the far-reaching implications of its interest rate adjustments across various sectors of the economy. Fluctuations in key interest rates resonate throughout the financial landscape, exerting influence on bank loans, market rates, mortgages, deposit rates, and other investment avenues.

However, for borrowers in Cyprus, the impending rate cut may yield only modest alleviation in their financial burdens. Despite the looming reduction, the gap between lending and deposit rates persists, as affirmed by the Central Bank of Cyprus. Recent statistics reveal marginal fluctuations in consumer and housing loan rates, indicating that the anticipated 0.25% reduction may offer limited relief to Cypriot depositors and borrowers.

Following the rate adjustment on June 6, 2024, the main refinancing operations' interest rate, along with the marginal lending facility and deposit facility rates, will stand at 4.25%, 4.50%, and 3.75%, respectively.

The year commenced with elevated interest rates, ushering in substantial profits for banks during the initial half of the year. By the advent of the rate cut on June 6, banks had already capitalized on excess liquidity, buoyed by favorable interest rates evident in their first-quarter financial reports. While the impending rate cuts may slightly diverge from the profit trajectory observed since September 2023, banks remain poised to achieve significant gains in 2024 compared to the previous year.

In July 2022, the ECB introduced historic negative interest rates in a bid to temper loan demand. Although the impact in Cyprus varied from that in other countries, lending experienced modest declines over the past two years. With the anticipated rate cuts on June 6 and the potential for two more by year-end, analysts anticipate a resurgence in lending activity in Cyprus. Lower interest rates are poised to render borrowing more accessible, potentially streamlining the borrowing process for Cypriots. Recent data from the Central Bank of Cyprus indicates a decrease in total new loans in March 2024 compared to February, signaling a possible upturn in lending activity following the impending rate adjustments.

[Summary of Panagiotis Rougalas' original story in Greek published in Kathimerini's Cyprus edition]