BoC will drop its lending rate by 1% with immediate effect for ‘active’ accounts linked to the bank’s base rate.
Under the Central Bank’s decision, commercial banks will be subject to a capital charge if they offer 2% more than the euribor for bank deposits.
The 12-month euribor rate on February 13 was 0.259%.
While the Central Bank’s rules relate to deposit rates, the real aim of the Central Bank move is to cut lending rates.
If banks get into competition on deposits, and offer higher rates to do so, they tend to increase lending rates at the same time in order to maintain their interest margins (the difference between the amount they pay for deposits and the amount they pay for loans).
BoC said that its 1 percentage point reduction today covers 180,000 accounts, 94,000 customers and generates an annual benefit to borrowers of €57.4 million.
BoC bank added that non-performing loans undergoing restructuring will have an additional benefit of 2%.
The Central Bank, meanwhile, said that it was “confident” that financial institutions would soon make similar reductions in lending rates.
Hellenic Bank committed last week to cutting rates once they were finalised, while the cooperative central bank has also already pre-emptively cut rates for performing loans.
Cyprus has the second highest lending rates in the eurozone after Greece.