Cyprus banks face a mixed outlook as the European Central Bank is expected to raise interest rates twice by July, as the Middle East conflict stokes inflation.
Higher rates raise concerns about the pace of credit expansion and economic uncertainty, but they also bring significant benefits for banks.
A portion of their loan portfolios carry variable rates, meaning rising rates feed through relatively quickly into interest income — so even if credit growth slows, income from existing loan books stands to increase.
Separately, since deposit rate increases typically lag behind loan rate rises, bank interest margins tend to widen during rate-rising cycles, a key driver of profitability, according to banking sources.
Policymakers believe that if the conflict does not end by April, the energy shock it has caused could develop into a serious energy crisis with consequences for the global economy that are difficult to quantify at this stage.
Markets are now pricing in at least one 50-basis-point increase, with some estimates pointing to as many as three ECB rate rises by year-end, which would push the benchmark rate to 2.75% from its current 2%.
Cyprus banking sources said that even a cumulative 50-basis-point increase this year would not significantly alter conditions for households and businesses.
Banks are currently focused on growing their loan books and meeting their targets. Fixed-rate programmes are not expected to see material changes, while variable-rate loans linked to Euribor indices adjust automatically.
The three-month Euribor has already risen to 2.13% from around 1.9% in early February, while the 12-month Euribor is pricing in further increases — a sign that the rate-cutting trend that had begun to take shape is now being reversed by inflationary pressures.
Despite the upward pressure, Cyprus borrowing costs remain below the eurozone average. The average household lending rate in Cyprus fell to 3.12% in February from 3.24% in January, staying below the eurozone average of 3.37%.
For home loans with a fixed-rate period of up to one year, the Cyprus rate dropped to 3.45% from 3.70% in January, also coming in slightly below the eurozone average.