The small size of the Cypriot economy and the surplus liquidity of the banking sector contribute to a slower pace of interest rate adjustments compared to larger Eurozone economies, Central Bank of Cyprus (CBC) Governor Christodoulos Patsalides stated on Monday. Speaking before the Finance Committee during discussions on the 2025 state budget, Patsalides highlighted key factors shaping interest rate trends in Cyprus.

“The small size of the economy contributes to a slower adjustment of interest rates than in larger economies,” Patsalides explained. “The pace of adjustment is further slowed down by the highly excess liquidity of the Cypriot banking sector, with a loan-to-deposit ratio of 49.3%, compared to 106.5% in the EU.”

Recent data indicates that lending rates in Cyprus have been decreasing across most loan categories, particularly corporate loans. The average interest rate for new business loans stood at 5.32% in September, down from a peak of 6.06% in October 2023, aligning with the downward trend in Euribor rates.

Similarly, mortgage lending rates have also declined, with the average interest rate for new mortgage loans dropping to 4.53% in September, compared to 5.19% in January 2024.

Deposit rates have followed a similar trend, albeit at a slower pace. The average interest rate on new household term deposits of up to one year was 1.98% in September, down from 2.24% in March. Meanwhile, deposit rates for businesses remained stable, averaging 2.14% in September, close to the yearly average.

Despite the CBC's dissatisfaction with the gap between deposit and lending rates, Patsalides emphasized that the Central Bank’s role as a supervisor does not permit intervention beyond publishing interest rates for transparency.

Looking ahead, Patsalides expressed his belief that the European Central Bank (ECB) will lower interest rates during its December 11-12 meeting. He stressed the importance of gradual rate reductions to avoid significant economic disruptions caused by sudden fluctuations.