THE CO-OP Bank’s planned 0.5 per cent interest rate cut in early May will not give the commercial banks enough room to cut their lending rates, a senior source in the Bank of Cyprus (BoC) said yesterday.
“Our deposit rate – like all the other commercial banks – is 3.5 per cent, while the Co-op’s deposit rate is 4.5 to 5.0 per cent, so a 0.5 per cent cut by the Co-op does not give us room for manoeuvre”, the source said.
The 0.5 per cent rate cut by the Co-op Bank, which was flagged by Commerce Minister Antonis Paschalides last Saturday, may appear modest, but according to an informed Co-op Bank source, “this is what is possible now. We have made the first step, and we intend to make further steps when we can.”
Meanwhile, BoC is proceeding with the lending rate increases it signalled three weeks ago, following the cut in the European Central Bank (ECB) base rate to 1.25 per cent. BoC’s large commercial customers have already received letters advising a 1.0 per cent increase in their loan margin, and letters are about to be sent out to advise private borrowers of a 2.0 per cent increase in the loan margin.
In effect, rather than pass on to their customers the benefit of the ECB base-rate cut, the commercial banks have absorbed the benefit themselves in the form of increased loan margins, based on their commercial argument that if they are to compete in the banking market by offering attractive rates to their depositors, then their borrowers must bear this cost of funds.
Before Cyprus joined the eurozone on January 1, 2008, each bank had more leeway in setting its own base rate, and then basing loan rates on either this or the interbank rate being offered at the time. Since Cyprus joined the euro, the large majority of the loans held by both the commercial banks and co-operative banking system are tied to the central base rate set by the ECB. This means that when the base interest rate moves, the banks can only readjust their cost of funds by readjusting their loan margins, especially in relation to deposit rates.
The BoC margin increase for commercial loans applies to all types, coming into effect on May 9 for loans taken out before January 1, 2008, and on the next roll-over date for loans linked to Euribor or Libor. The same effective dates are likely to apply to loans to private or small borrowers.
The other commercial banks are thought to be preparing to follow suit.
Two weeks ago, Finance Minister Charilaos Stavrakis had a meeting with the commercial and co-operative banks to discuss the pressing need for lending rates to come down. He spoke then of a “consensus and a commitment by the banks and cooperatives that, within the boundaries of free competition…they shall make a coordinated effort to scale down their interest rates.” Stavrakis followed that meeting with a further injection of €1 billion banking liquidity in the form of short-term treasury bonds.
