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Interest rates extended, borrowers face dilemma

ECB's stance leaves Cyprus borrowers hanging

Panayiotis Rougalas

Panayiotis Rougalas

Last Thursday, the European Central Bank (ECB) opted to maintain interest rates, extending the uncertainty for borrowers regarding their loans and repayments. This move aligns with analysts' forecasts of an eventual decrease in interest rates later in the year, once inflation levels reach the ECB's satisfaction.

All eyes are now on March 7, when policymakers will convene in Frankfurt to discuss monetary policy strategies. However, despite expectations, the ECB President offered no immediate indication of interest rate cuts during Thursday's meeting, heightening concerns among borrowers about their ability to meet loan obligations.

The decision to keep interest rates steady underscores the challenging path ahead in tackling inflation. According to the Governing Council's current assessment, maintaining the ECB's key interest rates at their current levels is deemed essential for making significant strides toward this objective.

Banking sources note that, presently, there are no widespread indications of borrowers struggling to meet their loan payments. Where issues have arisen, adjustments are being made to loan terms, or borrowers are opting for restructuring with fixed-rate contracts.

While renegotiations and loan restructurings were prevalent at the end of 2022 and into the summer of 2023, their frequency has since declined.

These measures primarily served a large cohort of borrowers who either faced or showed signs of facing challenges with successive interest rate hikes in the near future.

Notably, data presented to Parliament reveals that loan renegotiations and restructurings from January through the summer of 2023 totaled 3 billion euros, compared to 1.4 billion euros during the equivalent period in 2022 when interest rate hikes commenced.

In a surprising turn, December stood firm against the prevailing trend of dwindling borrowing spurred by rising interest rates, refusing to act as a deterrent.

Banking insiders revealed to the press that the weight of interest rates continues to burden borrowers, asserting that any reductions would still fall short of pre-ECB hike levels. "Even if rates drop, they won't plummet to the negative interest rate anomaly of the past decade," they emphasized, noting that current rates at 4.5% are projected to hover around 3%.

Key interest rates for main refinancing operations, marginal lending facilities, and deposit facilities stand at 4.5%, 4.75%, and 4%, respectively, with the ECB eyeing a return to its 2% medium-term inflation target.

The paradox surrounding Cyprus' financial landscape amidst interest rate hikes reveals December's defiance against borrowing declines, with new loans flowing unhindered. While deposits surged, aligning with ECB expectations during rate hikes, new loans also saw an upswing.

Official data from the Central Bank underscores this trend, with total deposits in December 2023 witnessing a net increase of 346 million euros, compared to 91.7 million euros in November 2023. The annual growth rate of total deposits reached 0.4%, totaling 52.2 billion euros in December 2023, buoyed by a surge in Cypriot deposits.

Similarly, total loans in December 2023 recorded a net increase of 284.2 million euros, signaling a shift from November's 15 million euros. The annual growth rate of total loans reached 0.7%, totaling 24.8 billion euros, driven by increased lending to households and non-financial corporations.

The European Central Bank (ECB) unveils its ambitious plan to combat climate change, outlining three key areas of focus for 2024 and 2025. It delves into the impacts and risks of transitioning to a green economy, the escalating physical impacts of climate change, and the risks associated with environmental loss and degradation.

Amidst the transition to a green economy, the ECB intensifies efforts to analyze transition finance impacts, green investment needs, and the repercussions of green transition on economic facets like employment and productivity.

Additionally, it delves deeper into the ramifications of climate change, assessing how extreme weather events influence inflation and the financial system while exploring potential adaptation strategies and associated investment requirements.

With a keen eye on the future, the ECB navigates the evolving financial landscape, poised to address the challenges posed by climate change and steer towards a sustainable, resilient economy.

[This article was translated from its Greek original]

Cyprus  |  banks  |  ECB  |  economy  |  EU  |  money

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