Central Bank Governor Constantinos Herodotou forecasted a potential easing of the European Central Bank’s (ECB) interest rates within 2024, provided there are no unforeseen developments.
Herodotou underscored the importance of closely following inflation data to ensure that the timing for reducing interest rates is optimal.
This statement came during his meeting with Finance Minister, Makis Keravnos, who also commented on the economic situation.
Keravnos pointed out that recent data shows a decline in the prices of essential goods, including fuels, and assured that the government is ready to implement targeted support measures if necessary, to avoid fuelling inflation further.
Both agreed that the Cypriot economy is currently on a positive trajectory, but they cautioned against complacency due to ongoing geopolitical tensions.
Keravnos remarked, “We have seen that the Cypriot economy is on a good trajectory, which we need to maintain.” Herodotou added that there’s a shared understanding of the external challenges and the impressive resilience of the Cypriot economy. However, he also highlighted the uncertainty caused by geopolitical events such as the attacks on the Suez Canal and the situation in the Middle East.
Lower interest rates possible in 2024
Regarding the ECB’s interest rates, Herodotou expressed optimism, noting the significant progress made in reducing inflation both in the Eurozone and Cyprus. He recalled the peak inflation rates in Cyprus during 2022 and how they had subsided by December, with minimal expected increases. “Taking into account the progress, I would certainly say that, barring any unexpected developments, interest rate reductions will begin within 2024,” he affirmed.
Herodotou stressed the importance of not reducing interest rates too early to prevent a resurgence of inflation, which would necessitate countermeasures. Conversely, delaying rate cuts could negatively impact economic growth. The goal is to carefully consider data to determine the appropriate timing for rate adjustments within 2024.
On the topic of geopolitical impacts, specifically the Houthi attacks in the Red Sea, Keravnos reassured that most consumer products in Cyprus come from European countries, thus mitigating direct impacts. However, he acknowledged the broader implications on the Cypriot economy due to its integration with the European economic framework.
Non-performing loans didn’t increase
In response to concerns about the potential for new non-performing loans due to increased interest rates, Herodotou pointed out the proactive measures taken by banks and the Central Bank to support both lenders and borrowers, highlighting the importance of learning from past mistakes.
Additionally, the absence of a Financial Ombudsman was addressed, with Keravnos indicating that the functioning of the related framework continues effectively under the supervision of the Assistant Financial Ombudsman. The process for appointing a new Ombudsman is underway, with the Council of Ministers set to make the final decision.
In response to whether borrowers have utilized the new framework, Keravnos mentioned that, so far, there has been a response with a significant number of applications for the new “Rent Against Installment” scheme from the early days. “I believe this shows that the government, after so many years, has implemented and put into practice a stable framework for foreclosures, which simultaneously has a relative safety net,” he added.
The Central Bank Governor reminded that for over two years, the Central Bank of Cyprus has been urging banks and credit acquisition companies to continuously restructure or renegotiate loans, showing positive results.
He indicated that total restructurings through renegotiations amounted to €2.2 billion, with this number soaring to €2.4 billion in 2023.
“The combination of measures is bringing very positive results for all borrowers and the economy itself,” he added.
When asked about actions to assist smaller banks in reducing their non-performing loan (NPL) ratio to a single-digit percentage, like the major banks, Herodotou recalled that the Central Bank of Cyprus hired a consortium of specialised consultants to develop a solution for the entire banking system, with the first phase showing such a solution is feasible.
He noted that the project is close to completing its second phase, conducted in collaboration with the Ministry of Finance and progressing well.
However, he stated that a decision on final implementation has not been made as analyses are ongoing and must be done in cooperation with the Ministry of Finance and European institutions.
“But the Central Bank of Cyprus is precisely working on a plan that will help small banks, which will again make our banking system even more resilient,” he emphasised.
Responding to the same question, Keravnos thanked the Central Bank of Cyprus for the collaboration in preparing the new framework for reducing NPLs in the broader economy and for the ongoing cooperation “exactly because we constantly have a healthier banking system, which is necessary.”
He also thanked the parliamentary parties for establishing a stable framework for foreclosures.
Finally, when asked if the measures announced by the President of the Republic for Turkish Cypriots, such as pension payments, have been costed, Keravnos mentioned that preliminary estimates have been made by the Ministry of Labour, but these are revised upon implementation.
Noting that the Ministry of Labour handles the issue, Keravnos responded that this is not a new matter. “It’s just that an addition is being made now for this particular issue,” he concluded.
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